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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

SQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023MARCH 31, 2024
OR
£TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-38280

Stellar Bancorp, Inc.
(Exact name of registrant as specified in its charter)

Texas20-8339782
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
9 Greenway Plaza, Suite 110
Houston, Texas 77046
(Address of principal executive offices, including zip code)
(713) 210-7600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, par value, $0.01 per shareSTEL New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S  No £
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes S  No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer£SAccelerated filerS£
Non-accelerated filer£Smaller reporting company£
Emerging growth company£
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S

As of November 2, 2023,April 24, 2024, the registrant had 53,262,21353,556,949 shares common stock, $0.01 par value per share, outstanding.


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STELLAR BANCORP, INC.
INDEX TO FORM 10-Q
September 30, 2023March 31, 2024
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PART I—FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
STELLAR BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,
2023
December 31,
2022
(In thousands, except shares and par value)
March 31,
2024
March 31,
2024
December 31,
2023
(In thousands, except shares and par value)(In thousands, except shares and par value)
ASSETSASSETS
Cash and due from banks
Cash and due from banks
Cash and due from banksCash and due from banks$94,970 $67,063 
Interest-bearing deposits at other financial institutionsInterest-bearing deposits at other financial institutions207,302 304,642 
Total cash and cash equivalentsTotal cash and cash equivalents302,272 371,705 
Available for sale securities, at fair valueAvailable for sale securities, at fair value1,414,952 1,807,586 
Loans held for investmentLoans held for investment8,004,528 7,754,751 
Less: allowance for credit losses on loansLess: allowance for credit losses on loans(93,575)(93,180)
Loans, netLoans, net7,910,953 7,661,571 
Accrued interest receivableAccrued interest receivable43,536 44,743 
Premises and equipment, netPremises and equipment, net119,332 126,803 
Federal Home Loan Bank stockFederal Home Loan Bank stock29,022 15,058 
Bank-owned life insuranceBank-owned life insurance104,699 103,094 
GoodwillGoodwill497,318 497,260 
Core deposit intangibles, netCore deposit intangibles, net122,944 143,525 
Other assetsOther assets120,432 129,092 
TOTAL ASSETSTOTAL ASSETS$10,665,460 $10,900,437 
LIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:LIABILITIES:
LIABILITIES:
LIABILITIES:
Deposits:
Deposits:
Deposits:Deposits:
Noninterest-bearingNoninterest-bearing$3,656,288 $4,230,169 
Noninterest-bearing
Noninterest-bearing
Interest-bearingInterest-bearing
Demand
Demand
DemandDemand1,397,492 1,591,828 
Money market and savingsMoney market and savings2,128,950 2,575,923 
Certificates and other timeCertificates and other time1,503,891 869,712 
Total interest-bearing depositsTotal interest-bearing deposits5,030,333 5,037,463 
Total depositsTotal deposits8,686,621 9,267,632 
Accrued interest payableAccrued interest payable7,612 2,098 
Borrowed fundsBorrowed funds323,981 63,925 
Subordinated debtSubordinated debt109,665 109,367 
Other liabilitiesOther liabilities76,735 74,239 
Total liabilitiesTotal liabilities9,204,614 9,517,261 
COMMITMENTS AND CONTINGENCIES (See Note 14)
COMMITMENTS AND CONTINGENCIES (See Note 13)COMMITMENTS AND CONTINGENCIES (See Note 13)
SHAREHOLDERS’ EQUITY:SHAREHOLDERS’ EQUITY:
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding at September 30, 2023 and December 31, 2022— — 
Common stock, $0.01 par value; 140,000,000 shares authorized; 53,321,541 shares issued and outstanding at September 30, 2023 and 52,954,985 shares issued and outstanding at December 31, 2022533 530 
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding at March 31, 2024 and December 31, 2023
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding at March 31, 2024 and December 31, 2023
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding at March 31, 2024 and December 31, 2023
Common stock, $0.01 par value; 140,000,000 shares authorized; 53,550,820 shares issued and outstanding at March 31, 2024 and 53,291,079 shares issued and outstanding at December 31, 2023
Capital surplusCapital surplus1,231,686 1,222,761 
Retained earningsRetained earnings385,600 303,146 
Accumulated other comprehensive lossAccumulated other comprehensive loss(156,973)(143,261)
Total shareholders’ equityTotal shareholders’ equity1,460,846 1,383,176 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITYTOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$10,665,460 $10,900,437 
See condensed notes to interim consolidated financial statements.
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STELLAR BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(Dollars in thousands, except per share data)
Three Months Ended March 31,Three Months Ended March 31,
202420242023
(Dollars in thousands, except per share data)(Dollars in thousands, except per share data)
INTEREST INCOME:INTEREST INCOME:
Loans, including feesLoans, including fees$138,948 $58,025 $398,608 $164,230 
Loans, including fees
Loans, including fees
Securities:Securities:
Taxable
Taxable
TaxableTaxable9,493 6,655 28,872 17,294 
Tax-exemptTax-exempt437 2,594 2,135 7,676 
Deposits in other financial institutionsDeposits in other financial institutions2,391 608 9,027 1,825 
Total interest incomeTotal interest income151,269 67,882 438,642 191,025 
INTEREST EXPENSE:INTEREST EXPENSE:
Demand, money market and savings deposits
Demand, money market and savings deposits
Demand, money market and savings depositsDemand, money market and savings deposits23,557 3,527 62,302 6,733 
Certificates and other time depositsCertificates and other time deposits13,282 1,664 26,211 5,742 
Borrowed fundsBorrowed funds5,801 499 13,653 799 
Subordinated debtSubordinated debt1,908 1,502 5,647 4,407 
Total interest expenseTotal interest expense44,548 7,192 107,813 17,681 
NET INTEREST INCOMENET INTEREST INCOME106,721 60,690 330,829 173,344 
Provision for credit lossesProvision for credit losses2,315 1,962 7,896 5,919 
Net interest income after provision for credit lossesNet interest income after provision for credit losses104,406 58,728 322,933 167,425 
NONINTEREST INCOME:NONINTEREST INCOME:
Nonsufficient funds and overdraft charges291 145 1,115 387 
Service charges on deposit accounts
Service charges on deposit accounts
Service charges on deposit accountsService charges on deposit accounts1,329 527 3,429 1,614 
Gain on sale of assetsGain on sale of assets— 42 192 25 
Bank-owned life insurance incomeBank-owned life insurance income551 135 1,605 610 
Debit card and ATM incomeDebit card and ATM income935 869 4,454 2,568 
OtherOther1,589 1,277 6,881 4,513 
Total noninterest incomeTotal noninterest income4,695 2,995 17,676 9,717 
NONINTEREST EXPENSE:NONINTEREST EXPENSE:
Salaries and employee benefits
Salaries and employee benefits
Salaries and employee benefitsSalaries and employee benefits39,495 22,013 116,570 66,605 
Net occupancy and equipmentNet occupancy and equipment4,455 2,129 12,360 6,554 
DepreciationDepreciation1,952 1,003 5,629 3,048 
Data processing and software amortizationData processing and software amortization4,798 2,541 14,526 7,561 
Professional feesProfessional fees997 485 4,088 1,285 
Regulatory assessments and FDIC insuranceRegulatory assessments and FDIC insurance1,814 1,134 5,863 3,651 
Amortization of intangiblesAmortization of intangibles6,876 750 20,636 2,252 
CommunicationsCommunications663 359 2,053 1,063 
AdvertisingAdvertising877 385 2,623 1,330 
Acquisition and merger-related expensesAcquisition and merger-related expenses3,421 10,551 12,483 12,669 
OtherOther5,400 2,681 15,722 10,434 
Total noninterest expenseTotal noninterest expense70,748 44,031 212,553 116,452 
INCOME BEFORE INCOME TAXESINCOME BEFORE INCOME TAXES38,353 17,692 128,056 60,690 
Provision for income taxesProvision for income taxes7,445 3,406 24,825 11,310 
NET INCOMENET INCOME$30,908 $14,286 $103,231 $49,380 
EARNINGS PER SHARE:EARNINGS PER SHARE:
BasicBasic$0.58 $0.51 $1.94 $1.72 
Basic
Basic
DilutedDiluted$0.58 $0.50 $1.94 $1.71 
DIVIDENDS PER SHAREDIVIDENDS PER SHARE$0.13 $0.10 $0.39 $0.30 
See condensed notes to interim consolidated financial statements.
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STELLAR BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(In thousands)
Net income$30,908 $14,286 $103,231 $49,380 
Other comprehensive loss:
Unrealized loss on securities:
Change in unrealized holding loss on available for sale securities during the period(31,638)(60,618)(17,390)(229,887)
Reclassification of gain realized on securities— (42)(234)(25)
Total other comprehensive loss(31,638)(60,660)(17,624)(229,912)
Deferred tax benefit related to other comprehensive loss6,669 12,739 3,912 48,282 
Other comprehensive loss, net of tax(24,969)(47,921)(13,712)(181,630)
Comprehensive income (loss)$5,939 $(33,635)$89,519 $(132,250)
Three Months Ended March 31,
20242023
(In thousands)
Net income$26,147 $37,148 
Other comprehensive (loss) income:
Unrealized (loss) gain on securities:
Change in unrealized holding (loss) gain on available for sale securities during the period(15,330)37,965 
Reclassification of gain realized on securities— (234)
Total other comprehensive (loss) income(15,330)37,731 
Deferred tax benefit (expense) related to other comprehensive loss3,228 (7,751)
Other comprehensive (loss) income, net of tax(12,102)29,980 
Comprehensive income$14,045 $67,128 
See condensed notes to interim consolidated financial statements.
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STELLAR BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
Common StockCommon StockCapital
Surplus
Retained
Earnings
Accumulated
Other Comprehensive
Income (Loss)
Total Shareholders’
Equity
Shares
(Dollars in thousands, except per share data)
(Dollars in thousands, except per share data)
(Dollars in thousands, except per share data)
BALANCE AT DECEMBER 31, 2022
Net income
Other comprehensive income
Cash dividends declared $0.13 per share
Common stock issued in connection
with the exercise of stock options
and restricted stock awards
Stock-based compensation expense
BALANCE AT MARCH 31, 2023
Common StockCapital
Surplus
Retained
Earnings
Accumulated
Other Comprehensive
Income (Loss)
Total Shareholders’
Equity
SharesAmount
(Dollars in thousands, except per share data)
BALANCE AT JUNE 30, 202228,586,426 $286 $524,033 $296,477 $(115,467)$705,329 
BALANCE AT DECEMBER 31, 2023
BALANCE AT DECEMBER 31, 2023
BALANCE AT DECEMBER 31, 2023
Net incomeNet income— — — 14,286 — 14,286 
Other comprehensive lossOther comprehensive loss— — — — (47,921)(47,921)
Cash dividends declared, $0.10 per share— — — (2,788)— (2,788)
Common stock issued in connection
with the exercise of stock options and
restricted stock awards
31,823 — 343 — — 343 
Repurchase of common stock(481,638)(5)(13,911)(13,916)
Stock-based compensation expense— — 969 — — 969 
BALANCE AT SEPTEMBER 30, 202228,136,611 $281 $511,434 $307,975 $(163,388)$656,302 
BALANCE AT JUNE 30, 202353,302,734 $533 $1,228,532 $361,619 $(132,004)$1,458,680 
Net income— — — 30,908 — 30,908 
Other comprehensive loss— — — — (24,969)(24,969)
Cash dividends declared, $0.13 per share— — — (6,927)— (6,927)
Cash dividends declared $0.13 per share
Common stock issued in connection
with the exercise of stock options
and restricted stock awards
Common stock issued in connection
with the exercise of stock options
and restricted stock awards
18,807 — 342 — — 342 
Stock-based compensation expenseStock-based compensation expense— — 2,812 — — 2,812 
BALANCE AT SEPTEMBER 30, 202353,321,541 $533 $1,231,686 $385,600 $(156,973)$1,460,846 
BALANCE AT DECEMBER 31, 202128,845,903 $289 $530,845 $267,092 $18,242 $816,468 
Net income— — — 49,380 — 49,380 
Other comprehensive loss— — — — (181,630)(181,630)
Cash dividends declared $0.30 per share— — — (8,497)— (8,497)
Common stock issued in connection
with the exercise of stock options
and restricted stock awards
122,619 1,327 — — 1,328 
Repurchase of common stock(831,911)(9)(23,597)— — (23,606)
Stock-based compensation expenseStock-based compensation expense— — 2,859 — — 2,859 
BALANCE AT SEPTEMBER 30, 202228,136,611 $281 $511,434 $307,975 $(163,388)$656,302 
BALANCE AT DECEMBER 31, 202252,954,985 $530 $1,222,761 $303,146 $(143,261)$1,383,176 
Net income— — — 103,231 — 103,231 
Other comprehensive loss— — — — (13,712)(13,712)
Cash dividends declared $0.39 per share— — — (20,777)— (20,777)
Common stock issued in connection
with the exercise of stock options
and restricted stock awards
366,556 690 — — 693 
Stock-based compensation expenseStock-based compensation expense— — 8,235 — — 8,235 
BALANCE AT SEPTEMBER 30, 202353,321,541 $533 $1,231,686 $385,600 $(156,973)$1,460,846 
BALANCE AT MARCH 31, 2024
See condensed notes to interim consolidated financial statements.
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STELLAR BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, Three Months Ended March 31,
20232022 20242023
(In thousands) (In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:CASH FLOWS FROM OPERATING ACTIVITIES:  CASH FLOWS FROM OPERATING ACTIVITIES:  
Net incomeNet income$103,231 $49,380 
Adjustments to reconcile net income to net cash provided by operating activities:Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and core deposit intangibles amortization26,265 5,300 
Depreciation and intangibles amortization
Depreciation and intangibles amortization
Depreciation and intangibles amortization
Net accretion of discount on loans
Net amortization of premium (discount) on securities
Provision for credit lossesProvision for credit losses7,896 5,919 
Deferred income tax benefit11,617 (954)
Net amortization of premium on investments5,098 7,903 
Excess tax benefit from stock-based compensation(70)(312)
Bank-owned life insurance income(1,605)(610)
Net accretion of discount on loans(35,065)(165)
Net amortization of discount on subordinated debt88 87 
Net accretion of discount on certificates of deposit(21)(45)
Deferred income tax expense
Stock based compensation expense
Net change in operating leases
Bank owned life insurance income
Federal Home Loan Bank stock dividends
Gain on sale of assets
Net gain on sale of assets(192)(25)
Federal Home Loan Bank stock dividends(799)(64)
Stock-based compensation expense8,235 2,859 
Net change in operating leases3,055 2,178 
Increase in accrued interest receivable and other assets(165)(1,415)
Increase in accrued interest payable and other liabilities9,319 4,082 
Excess tax benefit from stock based compensation
Excess tax benefit from stock based compensation
Excess tax benefit from stock based compensation
Decrease in accrued interest receivable and other assets
Decrease in accrued interest payable and other liabilities
Net cash provided by operating activitiesNet cash provided by operating activities136,887 74,118 
CASH FLOWS FROM INVESTING ACTIVITIES:CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available for sale securities
Purchase of available for sale securities
Purchase of available for sale securities
Proceeds from maturities and principal paydowns of available for sale securitiesProceeds from maturities and principal paydowns of available for sale securities685,707 2,320,157 
Proceeds from sales and calls of available for sale securitiesProceeds from sales and calls of available for sale securities320,691 12,056 
Purchase of available for sale securities(633,287)(2,414,630)
Net change in total loansNet change in total loans(223,256)(371,904)
Purchase of bank premises and equipmentPurchase of bank premises and equipment(5,621)(668)
Proceeds from sale of bank premises, equipment and other real estateProceeds from sale of bank premises, equipment and other real estate3,685 — 
Net purchase of Federal Home Loan Bank stock(13,165)(7,421)
Net cash provided by (used in) investing activities134,754 (462,410)
Net redemptions (purchases) of Federal Home Loan Bank stock
Net cash (used in) provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in noninterest-bearing deposits(573,881)222,754 
Net decrease in interest-bearing deposits(7,109)(609,629)
Net change in short-term other borrowed funds260,000 167,000 
Net decrease in noninterest-bearing deposits
Net decrease in noninterest-bearing deposits
Net decrease in noninterest-bearing deposits
Net increase (decrease) in interest-bearing deposits
Net change in borrowed funds
Dividends paid to common shareholdersDividends paid to common shareholders(20,777)(8,497)
Proceeds from the issuance of common stock and stock option exercises693 1,328 
Repurchase of common stock— (23,606)
Net cash used in financing activities(341,074)(250,650)
Dividends paid to common shareholders
Dividends paid to common shareholders
(Payments made) proceeds from the issuance of restricted stock and stock option exercises
Net cash provided by (used in) financing activities
Net cash provided by (used in) financing activities
Net cash provided by (used in) financing activities
NET CHANGE IN CASH AND CASH EQUIVALENTSNET CHANGE IN CASH AND CASH EQUIVALENTS(69,433)(638,942)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIODCASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD371,705 757,509 
CASH AND CASH EQUIVALENTS, END OF PERIODCASH AND CASH EQUIVALENTS, END OF PERIOD$302,272 $118,567 
SUPPLEMENTAL CASH FLOW INFORMATION:SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid$7,500 $10,550 
Interest paid
Interest paid
Interest paidInterest paid102,299 16,761 
Cash paid for operating lease liabilitiesCash paid for operating lease liabilities3,372 2,559 
SUPPLEMENTAL NONCASH DISCLOSURE:
Branch assets transferred to assets held for sale$3,819 $2,137 
See condensed notes to interim consolidated financial statements.
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STELLAR BANCORP, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023March 31, 2024
(Unaudited)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Nature of Operations-Stellar—Stellar Bancorp, Inc. (“Stellar”) through its wholly-owned subsidiary, Stellar Bank, (the “Bank”), and together with Stellar, collectively referred to herein as “we,” “us,” “our” and the “Company”), provides a diversified range of commercial banking services primarily to small- to medium-sized businesses. Stellar derives substantially all of its revenues and income from the operation of the Bank.

    We refer to the Houston-The Woodlands-Sugar Land metropolitan statistical area (“MSA”), as the Houston region (“Houston
region”) and the Beaumont-Port Arthur MSA, as the Beaumont region (“Beaumont region”). The Company is focused on delivering a
wide variety of relationship-driven commercial banking products and community-oriented services tailored to meet the needs of small-to medium-sized businesses, professionals and individuals through its 5554 banking centers with 3837 banking centers in the Houston
region, metropolitan statistical area (“MSA”), 16 banking centers in the Beaumont regionMSA and one banking center in Dallas, Texas, which we collectively refer to as our
markets.Texas.

Basis of Presentation-The—The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with guidance provided by the Securities and Exchange Commission (“SEC”). Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis, and all such adjustments are of a normal recurring nature. Transactions between Stellar and the Bank have been eliminated. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.2023. Operating results for the three and nine months ended September 30, 2023March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.2024.
Merger of EqualsReclassification-The merger of equals (the “Merger”) between Allegiance Bancshares, Inc. (“Allegiance”) and CBTX, Inc. (“CBTX”), was effective on October 1, 2022, with CBTX ass—Certain items in the surviving corporation that was renamed Stellar Bancorp, Inc. At the effective time of the Merger, each outstanding share of Allegiance common stock, par value of $1.00 per share, was converted into the right to receive 1.4184 shares of common stock of the Company. Immediately following the Merger, CommunityBank of Texas, N.A. (“CommunityBank”), a national banking association and a wholly-owned subsidiary of CBTX, merged with and into Allegiance Bank, a wholly owned subsidiary of Allegiance, with Allegiance Bank as the surviving bank. Allegiance Bank changed its name to Stellar Bank on February 18, 2023 in connection with the operational conversion.
The Merger constituted a business combination and was accounted for as a reverse merger using the acquisition method of accounting. As a result, Allegiance was the accounting acquirer and CBTX was the legal acquirer and the accounting acquiree. Accordingly, the historicalprior year financial statements of Allegiance became the historical financial statements of the combined company for all periods priorwere reclassified to October 1, 2022 (the “Merger Date”). In addition, the assets and liabilities of CBTX have been recorded at their estimated fair values and added to those of Allegiance as of October 1, 2022. The determination of fair value required management to make estimates about discount rates, expected future cash flows, market conditions and other future events that are subjective.
The Company’s results of operations for the three and nine months ended September 30, 2022 reflect Allegiance's historical results and do not include the historical results of CBTX. The Merger had a significant impact on all aspects of the Company’s financial statements, and financial results for periods after the Merger are not comparable to financial results for periods priorconform to the Merger. The number of shares issued and outstanding, earnings per share, capital surplus, dividends paid and all references to share quantities of the Company have been retrospectively adjusted to reflect the equivalent number of shares issued to holders of
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Table of Contentscurrent presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.

Allegiance common stock in the Merger. See Note 2 – Acquisitions in the accompanying notes to the consolidated financial statements for the impact of the Merger.
Significant Accounting and Reporting Policies
PoliciesThe Company’s significant accounting and reporting policies can be found in Note 1 of the Company’s annual financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.2023.
Adoption of NewRecent Accounting Standards

Accounting Standards Update (ASU) 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” was issued in December 2023. This update requires that public business entities on an annual basis (1) disclose specific categories in the tax rate reconciliation, (2) provide additional information for reconciling items that meet a quantitative threshold and (3) disaggregate income taxes paid by jurisdiction. ASU 2022-02, "Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." became2023-09 is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The Company is evaluating the Company for the first quarterimpact of 2023 and didthis ASU, but does not believe it will have a significant impact on the Company’s financial statements. ASU 2022-02 eliminates the troubled debt restructuring ("TDR") accounting model for creditors that have already adopted Topic 326, which is commonly referred to as the current expected credit loss model. In lieu of the TDR accounting model, the Company applies the general loan modification guidance in Subtopic 310-20 to all loan modifications, including modifications made for borrowers experiencing financial difficulty on a prospective basis. Under the general loan modification guidance, a modification is treated as a new loan only if the following two conditions are met: (1) the terms of the new loan are at least as favorable to the lender as the terms for comparable loans to other customers with similar collection risks; and (2) modifications to the terms of the original loan are more than minor. If either condition is not met, the modification is accounted for as the continuation of the old loan with any effect of the modification treated as a prospective adjustment to the loan’s effective interest rate.impact.
2. ACQUISITIONS
Merger of Equals
As described in Note 1
Nature of Operations and Summary of Significant Accounting and Reporting Policies, the Merger was completed on October 1, 2022.
Allegiance merged with and into CBTX with the surviving corporation renamed Stellar Bancorp, Inc. At the effective date of the Merger, each outstanding share of Allegiance common stock was converted into the right to receive 1.4184 shares of common stock of the Company.
The Company issued 28.1 million shares of its common stock to Allegiance shareholders in connection with the Merger, which represented 54.0% of the voting interests in the Company upon completion of the Merger. In accordance with FASB ASC 805-40-30-2, the purchase price in a reverse acquisition is determined based on the number of equity interests the legal acquiree would have had to issue to give the owners of the legal acquirer the same percentage equity interest in the combined entity that results from the reverse acquisition.
The table below summarizes the ownership of the combined company following the Merger, for each shareholder group, using shares of CBTX and Allegiance common stock outstanding at September 30, 2022 and Allegiance’s closing price on September 30, 2022 (shares in thousands).
Stellar Bancorp, Inc. Ownership
Number of CBTX Outstanding SharesPercentage Ownership
CBTX shareholders24,015 46.0 %
Allegiance shareholders28,137 54.0 %
Total52,152 100.0 %
The Merger was accounted for as a reverse merger using the acquisition method of accounting, which means that for accounting and financial reporting purposes, Allegiance was deemed to have acquired CBTX in the Merger, even though CBTX was the legal acquirer. Accordingly, Allegiance's historical financial statements are the historical financial statements of the combined company for all periods prior to October 1, 2022.
Total acquisition and merger-related expenses recognized for the three months ended September 30, 2023 and 2022 were $3.4 million and $10.6 million, respectively, and $12.5 million and $12.7 million for the nine months ended September 30, 2023 and 2022, respectively.
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3.2. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of the Company’s goodwill and core deposit intangible assets were as follows:
GoodwillCore Deposit
Intangibles
Servicing Assets
(In thousands)
Balance as of December 31, 2021$223,642 $14,658 $— 
Acquired intangibles273,618 138,150 329 
Amortization— (9,283)(20)
GoodwillGoodwillCore Deposit
Intangibles
Servicing Assets
(In thousands)(In thousands)
Balance as of December 31, 2022Balance as of December 31, 2022497,260 143,525 309 
AmortizationAmortization— (20,581)(55)
Measurement period adjustment58 — — 
Goodwill true-up
Decrease due to payoff of serviced loansDecrease due to payoff of serviced loans— — (27)
Balance as of September 30, 2023$497,318 $122,944 $227 
Balance as of December 31, 2023
Amortization
Balance as of March 31, 2024
Balance as of March 31, 2024
Balance as of March 31, 2024

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired recorded on the acquisition date of an entity. During the measurement period, the Company may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date. During the third quarter of 2023, the Company completed the final tax returns related to CBTX's business and operations through September 30, 2022. After completion of these tax returns, the Company increased income tax balances and goodwill in the amount of $58 thousand which finalized all purchase accounting adjustments for the Merger.
Goodwill is subject to impairment testing, which must be conducted at least annually or upon the occurrence of a triggering event. Various factors, such as the Company’s results of operations, the trading price of the Company’s common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. Goodwill is recorded and evaluated for impairment at its reporting unit, the Company. The Company's policy is to test goodwill for impairment annually as of October 1st, or on an interim basis if an event triggering an impairment assessment is determined to have occurred.
Testing of goodwill impairment comprises a two-step process. First, the Company performs a qualitative assessment to evaluate relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that an impairment has occurred, it proceeds to the quantitative impairment test, whereby it calculates the fair value of the reporting unit and compares it with its carrying amount, including goodwill. In its performance of impairment testing, the Company has the unconditional option to proceed directly to the quantitative impairment test, bypassing the qualitative assessment. If the carrying amount of the reporting unit exceeds the fair value, the amount by which the carrying amount exceeds fair value, up to the carrying value of goodwill, is recorded through earnings as an impairment charge. If the results of the qualitative assessment indicate that it is not more likely than not that an impairment has occurred, or if the quantitative impairment test results in a fair value of the reporting unit that is greater than the carrying amount, then no impairment charge is recorded.

During the nine months ended September 30, 2023, economic uncertainty and market volatility resulting from the rising interest rate environment and the recent banking crisis resulted in a decrease in the Company's stock price and market capitalization. Management believed such decrease was a triggering event requiring an interim goodwill impairment quantitative analysis for the third quarter 2023. As a result, the Company performed a qualitative assessment and quantitative impairment test on its only reporting unit as of September 30, 2023 and determined that there was no impairment as the fair value exceeded the carrying amount of the Company. If the Company had deemed intangible assets to be impaired, a non-cash charge for the amount of such impairment would be recorded through earnings and would have no impact on tangible capital or our regulatory capital.

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The estimated aggregate future amortization expense for core deposit intangible assets remaining as of September 30, 2023March 31, 2024 is as follows (in thousands):
Remaining 2023$6,232 
202424,166 
Remaining 2024
2025202521,528 
2026202618,896 
2027
ThereafterThereafter52,122 
TotalTotal$122,944 
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3. SECURITIES
The amortized cost and fair value of investment securities available for sale were as follows:
September 30, 2023
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(In thousands)
March 31, 2024March 31, 2024
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(In thousands)
Available for SaleAvailable for Sale
U.S. government and agency securities
U.S. government and agency securities
U.S. government and agency securitiesU.S. government and agency securities$409,152 $129 $(15,873)$393,408 
Municipal securitiesMunicipal securities258,901 545 (40,330)219,116 
Agency mortgage-backed pass-through securitiesAgency mortgage-backed pass-through securities378,573 22 (50,401)328,194 
Agency collateralized mortgage obligationsAgency collateralized mortgage obligations444,234 — (78,356)365,878 
Corporate bonds and otherCorporate bonds and other122,812 29 (14,485)108,356 
TotalTotal$1,613,672 $725 $(199,445)$1,414,952 
December 31, 2022
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(In thousands)
December 31, 2023December 31, 2023
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(In thousands)
Available for SaleAvailable for Sale    Available for Sale  
U.S. government and agency securitiesU.S. government and agency securities$433,417 $90 $(19,227)$414,280 
Municipal securitiesMunicipal securities580,076 4,319 (43,826)540,569 
Agency mortgage-backed pass-through securitiesAgency mortgage-backed pass-through securities370,471 362 (42,032)328,801 
Agency collateralized mortgage obligationsAgency collateralized mortgage obligations461,760 — (67,630)394,130 
Corporate bonds and otherCorporate bonds and other143,192 (13,388)129,806 
TotalTotal$1,988,916 $4,773 $(186,103)$1,807,586 
As of September 30, 2023,March 31, 2024, no allowance for credit losses has been recognized on available for sale securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality. This belief is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our available for sale securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.
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The amortized cost and fair value of investment securities at September 30, 2023,March 31, 2024, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations at any time with or without call or prepayment penalties.
Amortized
Cost
Fair
Value
(In thousands)
Due in one year or less$76,060 $74,067 
Due after one year through five years83,030 78,334 
Due after five years through ten years137,346 121,106 
Due after ten years343,370 316,719 
Subtotal639,806 590,226 
Agency mortgage-backed pass-through securities
    and collateralized mortgage obligations
1,048,074 932,874 
Total$1,687,880 $1,523,100 
Securities with unrealized losses segregated by length of time in a continuous loss position were as follows:
March 31, 2024
Less than 12 MonthsMore than 12 MonthsTotal
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
(In thousands)
Available for Sale
U.S. government and agency
    securities
$35,927 $(628)$229,325 $(9,442)$265,252 $(10,070)
Municipal securities2,159 (16)172,364 (27,211)174,523 (27,227)
Agency mortgage-backed
    pass-through securities
104,502 (2,385)284,000 (40,288)388,502 (42,673)
Agency collateralized mortgage
    obligations
119,120 (2,905)335,294 (69,846)454,414 (72,751)
Corporate bonds and other7,101 (2,637)89,893 (10,915)96,994 (13,552)
Total$268,809 $(8,571)$1,110,876 $(157,702)$1,379,685 $(166,273)
December 31, 2023
Less than 12 MonthsMore than 12 MonthsTotal
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
(In thousands)
Available for Sale
U.S. government and agency
    securities
$110,038 $(2,208)$154,145 $(7,993)$264,183 $(10,201)
Municipal securities1,303 (14)177,957 (27,157)179,260 (27,171)
Agency mortgage-backed
     pass-through securities
80,208 (1,444)257,779 (35,717)337,987 (37,161)
Agency collateralized mortgage
     obligations
23,051 (621)348,854 (63,932)371,905 (64,553)
Corporate bonds and other11,279 (1,452)85,285 (11,215)96,564 (12,667)
Total$225,879 $(5,739)$1,024,020 $(146,014)$1,249,899 $(151,753)
During the three months ended March 31, 2024, the Company had sales and calls of securities of $5.1 million of securities. During the three months ended March 31, 2023, the Company had sales and calls of securities of $320.7 million and recorded gross
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Amortized
Cost
Fair
Value
(In thousands)
Due in one year or less$77,562 $77,026 
Due after one year through five years185,518 174,016 
Due after five years through ten years141,625 125,892 
Due after ten years386,160 343,946 
Subtotal790,865 720,880 
Agency mortgage-backed pass-through securities
    and collateralized mortgage obligations
822,807 694,072 
Total$1,613,672 $1,414,952 
Securities with unrealized losses segregated by length of time such securities have been in a continuous loss position are as follows:
September 30, 2023
Less than 12 MonthsMore than 12 MonthsTotal
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
(In thousands)
Available for Sale
U.S. government and agency
    securities
$111,573 $(3,328)$261,872 $(12,545)$373,445 $(15,873)
Municipal securities18,062 (640)166,011 (39,690)184,073 (40,330)
Agency mortgage-backed
    pass-through securities
79,012 (3,829)248,186 (46,572)327,197 (50,401)
Agency collateralized mortgage
    obligations
13,881 (168)351,996 (78,188)365,878 (78,356)
Corporate bonds and other11,314 (1,249)81,556 (13,236)92,870 (14,485)
Total$233,842 $(9,214)$1,109,621 $(190,231)$1,343,463 $(199,445)
December 31, 2022
Less than 12 MonthsMore than 12 MonthsTotal
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
(In thousands)
Available for Sale
U.S. government and agency
    securities
$99,732 $(1,427)$305,256 $(17,800)$404,988 $(19,227)
Municipal securities228,192 (14,473)134,640 (29,353)362,832 (43,826)
Agency mortgage-backed
     pass-through securities
95,291 (7,612)199,836 (34,420)295,127 (42,032)
Agency collateralized mortgage
     obligations
117,147 (14,426)276,925 (53,204)394,072 (67,630)
Corporate bonds and other72,913 (5,704)49,893 (7,684)122,806 (13,388)
Total$613,275 $(43,642)$966,550 $(142,461)$1,579,825 $(186,103)
During the nine months ended September 30, 2023, the Company had sales and calls of securities of $320.5 million of securities recording gross gains of $234 thousand. During the nine months ended September 30, 2022, the Company sold $12.1 million of securities recording a gross gain of $42 thousand on the sale of those securities. At September 30, 2023March 31, 2024 and December 31, 2022,2023, the Company did not own securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of consolidated shareholders’ equity at such respective dates.
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The carrying value of pledged securities was $711.8$601.9 million at September 30, 2023March 31, 2024 and $978.9$607.5 million at December 31, 2022.2023. The majority of the securities in each case were pledged to collateralize public fund deposits.
5.4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The loan portfolio balances, net of unearned income and fees, consist of various types of loans primarily made to borrowers located within Texas and are segregated by class of loan were as follows:
September 30, 2023December 31, 2022
(In thousands)
March 31, 2024March 31, 2024December 31, 2023
(In thousands)(In thousands)
Commercial and industrialCommercial and industrial$1,474,600 $1,455,795 
Paycheck Protection Program (PPP)Paycheck Protection Program (PPP)5,968 13,226 
Real estate:Real estate:
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)Commercial real estate (including multi-family residential)4,076,606 3,931,480 
Commercial real estate construction and land developmentCommercial real estate construction and land development1,078,265 1,037,678 
1-4 family residential (including home equity)1-4 family residential (including home equity)1,024,945 1,000,956 
Residential constructionResidential construction289,553 268,150 
Consumer and otherConsumer and other54,591 47,466 
Total loansTotal loans8,004,528 7,754,751 
Allowance for credit losses on loansAllowance for credit losses on loans(93,575)(93,180)
Loans, netLoans, net$7,910,953 $7,661,571 
Nonaccrual and Past Due Loans
An aging analysis of the recorded investment in past due loans, segregated by class of loans, is included below. The Company defines recorded investment as the outstanding loan balances including net deferred loan fees, and excluding accrued interest receivable of $36.4$37.9 million and $34.1$37.4 million as of September 30, 2023March 31, 2024 and December 31, 2022,2023, respectively, due to immateriality.
September 30, 2023
Loans Past Due and Still AccruingNonaccrual
Loans
Current
Loans
Total
Loans
30-89
Days
90 or More
Days
Total Past
Due Loans
(In thousands)
March 31, 2024March 31, 2024
Loans Past Due and Still AccruingNonaccrual
Loans
Current
Loans
Total
Loans
(In thousands)
(In thousands)
Commercial and industrialCommercial and industrial$3,535 $— $3,535 $14,971 $1,456,094 $1,474,600 
Paycheck Protection Program (PPP)Paycheck Protection Program (PPP)85 — 85 20 5,863 5,968 
Real estate:Real estate:
Commercial real estate (including
multi-family residential)
Commercial real estate (including
multi-family residential)
Commercial real estate (including
multi-family residential)
Commercial real estate (including
multi-family residential)
19,649 — 19,649 13,563 4,043,394 4,076,606 
Commercial real estate construction
and land development
Commercial real estate construction
and land development
4,405 — 4,405 170 1,073,690 1,078,265 
1-4 family residential (including
home equity)
1-4 family residential (including
home equity)
4,742 — 4,742 8,442 1,011,761 1,024,945 
Residential constructionResidential construction3,389 — 3,389 635 285,529 289,553 
Consumer and otherConsumer and other215 — 215 490 53,886 54,591 
Total loansTotal loans$36,020 $— $36,020 $38,291 $7,930,217 $8,004,528 
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December 31, 2022
Loans Past Due and Still AccruingNonaccrual
Loans
Current
Loans
Total
Loans
30-89
Days
90 or More
Days
Total Past
Due Loans
(In thousands)
December 31, 2023December 31, 2023
Loans Past Due and Still AccruingNonaccrual
Loans
Current
Loans
Total
Loans
(In thousands)
(In thousands)
Commercial and industrialCommercial and industrial$1,591 $— $1,591 $25,297 $1,428,907 $1,455,795 
Paycheck Protection Program (PPP)Paycheck Protection Program (PPP)517 — 517 105 12,604 13,226 
Real estate:Real estate:
Commercial real estate (including
multi-family residential)
Commercial real estate (including
multi-family residential)
Commercial real estate (including
multi-family residential)
Commercial real estate (including
multi-family residential)
3,222 — 3,222 9,970 3,918,288 3,931,480 
Commercial real estate construction
and land development
Commercial real estate construction
and land development
851 — 851 — 1,036,827 1,037,678 
1-4 family residential (including
home equity)
1-4 family residential (including
home equity)
3,385 — 3,385 9,404 988,167 1,000,956 
Residential constructionResidential construction— — — — 268,150 268,150 
Consumer and otherConsumer and other192 — 192 272 47,002 47,466 
Total loansTotal loans$9,758 $— $9,758 $45,048 $7,699,945 $7,754,751 
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt. The Company utilizes a risk rating matrix to assign a risk rating to each of its loans. Loans are rated on a scale of 10 to 90. Risk ratings are updated on an ongoing basis and are subject to change by continuous loan monitoring processes including lending management monitoring, executive management and board committee oversight, and independent credit review. As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the allowance for credit losses, management assigns and tracks certain risk ratings to be used as credit quality indicators including trends related to (1) the weighted-average risk grade of loans, (2) the level of classified loans, (3) the delinquency status of loans, (4) nonperforming loans and (5) the general economic conditions in the our markets.market. Individual bankers, under the oversight of credit administration, review updated financial information for all pass grade commercial loans to reassess the risk grade on at least an annual basis. When a loan reaches a set of internally designated criteria, including Substandard or higher, a special assets officer will be involved in the monitoring of the loan on an on-going basis.
The following is a general description of the risk ratings used by the Company:
Pass—Credits in this category contain an acceptable amount of risk.
Special Mention—Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Substandard—Loans classified as substandard have well-defined weaknesses on a continuing basis and are inadequately protected by the current net worth and paying capacity of the borrower, declining collateral values, or a continuing downturn in their industry which is reducing their profits to below zero and having a significantly negative impact on their cash flow. These loans so classified are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful—Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Loss—Loans classified as loss are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.
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The following table presents risk ratings by category and the gross charge-offs by primary loan type and year of origination or renewal. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period
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originations for purposes of the table below. The following summarizes the amortized cost basis of loans by year of origination/renewal and credit quality indicator by class of loan as of September 30, 2023March 31, 2024 and December 31, 2022:2023:
 September 30, 2023December 31, 2022
Term Loans Amortized Cost Basis by Origination YearRevolving
Loans
Revolving Loans
Converted to Term Loans
TotalTotal
20232022202120202019Prior
(In thousands)
March 31, 2024 March 31, 2024December 31, 2023
Term Loans Amortized Cost Basis by Origination YearRevolving
Loans
Revolving Loans
Converted to Term Loans
TotalTotal
(In thousands)
(In thousands)
Commercial and industrialCommercial and industrial
Pass
Pass
PassPass$249,626 $299,874 $194,032 $47,217 $31,150 $23,062 $528,399 $63,180 $1,436,540 $1,400,191 
Special MentionSpecial Mention2,786 403 508 438 861 — 3,054 102 8,152 18,982 
SubstandardSubstandard1,250 3,925 9,303 1,140 12,131 281 1,057 771 29,858 36,568 
DoubtfulDoubtful— 50 — — — — — — 50 54 
Total commercial and industrial
loans
Total commercial and industrial
loans
$253,662 $304,252 $203,843 $48,795 $44,142 $23,343 $532,510 $64,053 $1,474,600 $1,455,795 
Current period gross charge-offsCurrent period gross charge-offs$— $130 $4,264 $456 $129 $— $4,143 $531 $9,653 
Current period gross charge-offs
Current period gross charge-offs
Paycheck Protection Program (PPP)Paycheck Protection Program (PPP)
Paycheck Protection Program (PPP)
Paycheck Protection Program (PPP)
Pass
Pass
PassPass$— $— $3,218 $2,750 $— $— $— $— $5,968 $13,226 
Special MentionSpecial Mention— — — — — — — — — — 
SubstandardSubstandard— — — — — — — — — — 
DoubtfulDoubtful— — — — — — — — — — 
Total PPP loansTotal PPP loans$— $— $3,218 $2,750 $— $— $— $— $5,968 $13,226 
Current period gross charge-offsCurrent period gross charge-offs$— $— $— $— $— $— $— $— $— 
Current period gross charge-offs
Current period gross charge-offs
Commercial real estate
(including multi-family residential)
Commercial real estate
(including multi-family residential)
Commercial real estate
(including multi-family residential)
Commercial real estate
(including multi-family residential)
Pass
Pass
PassPass$366,601 $1,327,957 $863,078 $467,867 $348,105 $480,980 $128,848 $11,052 $3,994,488 $3,844,951 
Special MentionSpecial Mention934 508 7,756 8,409 1,716 12,414 305 — 32,042 18,183 
SubstandardSubstandard3,906 5,050 16,003 6,832 5,009 12,890 286 100 50,076 68,346 
DoubtfulDoubtful— — — — — — — — — — 
Total commercial real estate
(including multi-family
residential) loans
Total commercial real estate
(including multi-family
residential) loans
$371,441 $1,333,515 $886,837 $483,108 354830$506,284 $129,439 $11,152 $4,076,606 $3,931,480 
Current period gross charge-offsCurrent period gross charge-offs$— $— $— $— $— $— $— $— $— 
Current period gross charge-offs
Current period gross charge-offs
Commercial real estate construction
and land development
Commercial real estate construction
and land development
Commercial real estate construction
and land development
Commercial real estate construction
and land development
Pass
Pass
PassPass$211,096 $518,943 $227,438 $29,351 $9,689 $6,189 $58,463 $693 $1,061,862 $1,025,141 
Special MentionSpecial Mention— 2,222 2,062 139 — 202 — — 4,625 832 
SubstandardSubstandard22 1,016 10,406 88 80 17 — 149 11,778 11,705 
DoubtfulDoubtful— — — — — — — — — — 
Total commercial real estate
construction and land development
Total commercial real estate
construction and land development
$211,118 $522,181 $239,906 $29,578 $9,769 $6,408 $58,463 $842 $1,078,265 $1,037,678 
Current period gross charge-offsCurrent period gross charge-offs$— $— $— $— $— $— $— $— $— 
Current period gross charge-offs
Current period gross charge-offs
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 September 30, 2023December 31, 2022
Term Loans Amortized Cost Basis by Origination YearRevolving LoansRevolving Loans
Converted to Term Loans
20232022202120202019PriorTotalTotal
(In thousands)
March 31, 2024 March 31, 2024December 31, 2023
20242023202220212020PriorTotalTotal
(In thousands)(In thousands)
1-4 family residential (including
home equity)
1-4 family residential (including
home equity)
Pass
Pass
PassPass$132,680 $252,160 $224,562 $116,514 $72,701 $90,921 $94,320 $10,248 $994,106 $969,396 
Special MentionSpecial Mention499 569 — 1,996 333 195 98 — 3,690 3,714 
SubstandardSubstandard1,940 2,399 3,103 1,468 3,893 4,493 7,071 2,782 27,149 27,846 
DoubtfulDoubtful— — — — — — — — — — 
Total 1-4 family residential
(including home equity)
Total 1-4 family residential
(including home equity)
$135,119 $255,128 $227,665 $119,978 $76,927 $95,609 $101,489 $13,030 $1,024,945 $1,000,956 
Current period gross charge-offsCurrent period gross charge-offs$— $— $— $— $— $23 $— $— $23 
Current period gross charge-offs
Current period gross charge-offs
Residential constructionResidential construction
Residential construction
Residential construction
Pass
Pass
PassPass$116,508 $136,500 $6,341 $4,117 $658 $499 $21,710 $— $286,333 $266,943 
Special MentionSpecial Mention— 634 — — — — — — 634 421 
SubstandardSubstandard— 635 1,951 — — — — — 2,586 786 
DoubtfulDoubtful— — — — — — — — — — 
Total residential constructionTotal residential construction$116,508 $137,769 $8,292 $4,117 $658 $499 $21,710 $— $289,553 $268,150 
Current period gross charge-offsCurrent period gross charge-offs$— $— $— $— $— $— $— $— $— 
Current period gross charge-offs
Current period gross charge-offs
Consumer and otherConsumer and other
Consumer and other
Consumer and other
Pass
Pass
PassPass$23,489 $9,146 $4,130 $2,005 $676 $465 $13,192 $901 $54,004 $47,062 
Special MentionSpecial Mention— 26 — — — — 45 — 71 43 
SubstandardSubstandard— 312 35 — 56 104 516 361 
DoubtfulDoubtful— — — — — — — — — — 
Total consumer and otherTotal consumer and other$23,489 $9,484 $4,165 $2,005 $732 $470 $13,241 $1,005 $54,591 $47,466 
Current period gross charge-offsCurrent period gross charge-offs$— $44 $— $— $— $— $$— $45 
Current period gross charge-offs
Current period gross charge-offs
Total loansTotal loans
Total loans
Total loans
Pass
Pass
PassPass$1,100,000 $2,544,580 $1,522,799 $669,821 $462,979 $602,116 $844,932 $86,074 $7,833,301 $7,566,910 
Special MentionSpecial Mention4,219 4,362 10,326 10,982 2,910 12,811 3,502 102 49,214 42,175 
SubstandardSubstandard7,118 13,337 40,801 9,528 21,169 17,686 8,418 3,906 121,963 145,612 
DoubtfulDoubtful— 50 — — — — — — 50 54 
Total loansTotal loans$1,111,337 $2,562,329 $1,573,926 $690,331 $487,058 $632,613 $856,852 $90,082 $8,004,528 $7,754,751 
Current period gross charge-offsCurrent period gross charge-offs$— $174 $4,264 $456 $129 $23 $4,144 $531 $9,721 
Current period gross charge-offs
Current period gross charge-offs

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The following table presents the activity in the allowance for credit losses on loans by portfolio type for the three and nine months ended September 30, 2023March 31, 2024 and 2022:2023:
Commercial
and industrial
Paycheck Protection
Program (PPP)
Commercial real
estate (including multi-family
residential)
Commercial real
estate construction and land
development
1-4 family residential
(including
home equity)
Residential
construction
Consumer
and other
Total
(In thousands)
Commercial
and industrial
Commercial
and industrial
Paycheck Protection
Program (PPP)
Commercial real
estate (including multi-family
residential)
Commercial real
estate construction and land
development
1-4 family residential
(including
home equity)
Residential
construction
Consumer
and other
Total
(In thousands)
Allowance for credit losses on
loans:
Allowance for credit losses on
loans:
Three Months EndedThree Months Ended
Balance June 30, 2023$38,505 $— $38,963 $14,500 $4,757 $3,080 $390 $100,195 
Three Months Ended
Three Months Ended
Balance December 31, 2023
Balance December 31, 2023
Balance December 31, 2023
Provision for credit losses on loansProvision for credit losses on loans2,173 — 58 (791)34 (221)243 1,496 
Charge-offsCharge-offs(8,169)— — — — — (7)(8,176)
RecoveriesRecoveries55 — — — — 60 
Net charge-offsNet charge-offs(8,114)— — — — (4)(8,116)
Balance September 30, 2023$32,564 $— $39,023 $13,709 $4,791 $2,859 $629 $93,575 
Nine Months Ended
Balance March 31, 2024
Three Months Ended
Three Months Ended
Three Months Ended
Balance December 31, 2022
Balance December 31, 2022
Balance December 31, 2022Balance December 31, 2022$41,236 $— $32,970 $14,121 $2,709 $1,796 $348 $93,180 
Provision for credit losses on loansProvision for credit losses on loans(143)— 6,037 (412)2,096 1,063 298 8,939 
Charge-offsCharge-offs(9,653)— — — (23)— (45)(9,721)
RecoveriesRecoveries1,124 — 16 — — 28 1,177 
Net charge-offsNet charge-offs(8,529)— 16 — (14)— (17)(8,544)
Balance September 30, 2023$32,564 $— $39,023 $13,709 $4,791 $2,859 $629 $93,575 
Three Months Ended
Balance June 30, 2022$16,701 $— $24,000 $7,399 $1,036 $1,048 $58 $50,242 
Provision for credit losses on loans(1,091)— 1,606 952 (9)188 14 1,660 
Charge-offs(2)— (56)— — — (17)(75)
Recoveries319 — — — — — 320 
Net recoveries317 — (56)— — — (16)245 
Balance September 30, 2022$15,927 $— $25,550 $8,351 $1,027 $1,236 $56 $52,147 
Nine Months Ended
Balance December 31, 2021$16,629 $— $23,143 $6,263 $847 $975 $83 $47,940 
Provision for credit losses on loans(464)— 2,740 2,096 180 261 37 4,850 
Charge-offs(958)— (383)(63)— — (65)(1,469)
Recoveries720 — 50 55 — — 826 
Net charge-offs(238)— (333)(8)— — (64)(643)
Balance September 30, 2022$15,927 $— $25,550 $8,351 $1,027 $1,236 $56 $52,147 
Balance March 31, 2023
Allowance for Credit Losses on Unfunded Commitments

In addition to the allowance for credit losses on loans, the Company has established an allowance for credit losses on unfunded commitments, classified in other liabilities and adjusted as a provision for credit loss expense. The allowance represents estimates of expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to fund. The estimate of commitments expected to fund is informed by historical analysis looking at utilization rates. The expected credit loss rates applied to the commitments expected to fund is informed by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers. The allowance for credit losses on unfunded commitments as of September 30, 2023March 31, 2024 and December 31, 20222023 was $10.9$10.1 million and $12.0$11.3 million, respectively. This reserve is maintained at a level management believes to be sufficient to absorb losses arising from unfunded loan commitments. The Company recorded an $818 thousanda reversal of provision of $1.2 million provision on unfunded commitments during the three months ended September 30, 2023March 31, 2024 compared to $302a provision of $466 thousand for the three months ended September 30, 2022 and recorded a $1.0 million reversal of provision on unfunded commitments for the nine months ended September 30, 2023 compared to a provision of $1.1 million for the nine months ended September 30, 2022.March 31, 2023.
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Collateral Dependent Loans
Collateral dependent loans are secured by real estate assets, accounts receivable, inventory and equipment. For a collateral dependent loan, the Company’s evaluation process includes a valuation by appraisal or other collateral analysis adjusted for selling costs, when appropriate. This valuation is compared to the remaining outstanding principal balance of the loan. If a loss is determined to be probable, the loss is included in the allowance for credit losses on loans as a specific allocation.
The following tables present the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses as of September 30, 2023March 31, 2024 and December 31, 2022:2023:
September 30, 2023
Real EstateBusiness AssetsOtherTotal
(In thousands)
March 31, 2024March 31, 2024
Real EstateReal EstateBusiness AssetsOtherTotal
(In thousands)(In thousands)
Commercial and industrialCommercial and industrial$— $7,476 $— $7,476 
Real estate:Real estate:
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)Commercial real estate (including multi-family residential)3,411 — — 3,411 
Commercial real estate construction and land developmentCommercial real estate construction and land development— — — 
1-4 family residential (including home equity)1-4 family residential (including home equity)— — — — 
Residential constructionResidential construction— — — — 
Consumer and otherConsumer and other— — — — 
TotalTotal$3,411 $7,476 $— $10,887 
December 31, 2022
Real EstateBusiness AssetsOtherTotal
(In thousands)
December 31, 2023December 31, 2023
Real EstateReal EstateBusiness AssetsOtherTotal
(In thousands)(In thousands)
Commercial and industrialCommercial and industrial$— $18,411 $30 $18,441 
Real estate:Real estate:
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)Commercial real estate (including multi-family residential)1,612 — — 1,612 
Commercial real estate construction and land developmentCommercial real estate construction and land development— — — — 
1-4 family residential (including home equity)1-4 family residential (including home equity)3,478 — — 3,478 
Residential constructionResidential construction— — — — 
Consumer and otherConsumer and other— — — — 
TotalTotal$5,090 $18,411 $30 $23,531 
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Nonaccrual Loans
The following tables present additional information regarding nonaccrual loans. No interest income was recognized on nonaccrual loans as of September 30, 2023March 31, 2024 and December 31, 2022.2023.
September 30, 2023
Nonaccrual Loans with No Related AllowanceNonaccrual Loans with Related AllowanceTotal Nonaccrual Loans
(In thousands)
March 31, 2024March 31, 2024
Nonaccrual Loans with No Related AllowanceNonaccrual Loans with No Related AllowanceNonaccrual Loans with Related AllowanceTotal Nonaccrual Loans
(In thousands)(In thousands)
Commercial and industrialCommercial and industrial$10,337 $4,634 $14,971 
Paycheck Protection Program (PPP)Paycheck Protection Program (PPP)20 — 20 
Paycheck Protection Program (PPP)
Paycheck Protection Program (PPP)
Real estate:Real estate:
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)Commercial real estate (including multi-family residential)10,820 2,743 13,563 
Commercial real estate construction and land developmentCommercial real estate construction and land development170 — 170 
1-4 family residential (including home equity)1-4 family residential (including home equity)6,849 1,593 8,442 
Residential constructionResidential construction635 — 635 
Consumer and otherConsumer and other81 409 490 
Total loansTotal loans$28,912  $9,379  $38,291 
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 December 31, 2022
Nonaccrual Loans with No Related AllowanceNonaccrual Loans with Related AllowanceTotal Nonaccrual Loans
(In thousands)
December 31, 2023 December 31, 2023
Nonaccrual Loans with No Related AllowanceNonaccrual Loans with No Related AllowanceNonaccrual Loans with Related AllowanceTotal Nonaccrual Loans
(In thousands)(In thousands)
Commercial and industrialCommercial and industrial$2,776 $22,521 $25,297 
Paycheck Protection Program (PPP)Paycheck Protection Program (PPP)105 — 105 
Paycheck Protection Program (PPP)
Paycheck Protection Program (PPP)
Real estate:Real estate:
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)Commercial real estate (including multi-family residential)8,704 1,266 9,970 
Commercial real estate construction and land developmentCommercial real estate construction and land development— — — 
1-4 family residential (including home equity)1-4 family residential (including home equity)4,856 4,548 9,404 
Residential constructionResidential construction— — — 
Consumer and otherConsumer and other94 178 272 
Total loansTotal loans$16,535 $28,513 $45,048 
Loan Modifications and Troubled Debt Restructurings
Effective January 1, 2023, under ASU 2022-02, loan modifications are reported if concessions have been granted to borrowers that are experiencing financial difficulty. Information on these loan modifications originated after the effective date is presented according to the new accounting guidance. Reporting periods prior to the adoption of ASU 2022-02 present information on troubled debt restructurings ("TDRs") under the previous disclosure requirements. The percentage of loans modified comprised less than 1% of their respective classes of loan portfolios at September 30, 2023.March 31, 2024.
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The following tables present information regarding loans that were modified due to the borrowers experiencing financial difficulty during the three and nine months ended September 30,March 31, 2024 and 2023:
Three Months Ended September 30, 2023
Interest Rate ReductionTerm ExtensionPayment DelayPrincipal forgivenessCombination Term Extension and Principal ForgivenessCombination Term Extension and Payment DelayTotal
(In thousands)
Three Months Ended March 31, 2024Three Months Ended March 31, 2024
Interest Rate ReductionInterest Rate ReductionTerm ExtensionPayment DelayPrincipal forgivenessCombination Term Extension and Principal ForgivenessCombination Term Extension and Payment DelayTotal
(In thousands)
Commercial and industrial
Commercial and industrial
Commercial and industrialCommercial and industrial$— $— $— $— $— $— $— 
Real estate:Real estate:
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)
Commercial real estate (including
multi-family residential)
Commercial real estate (including
multi-family residential)
1,8901,8901,8001,800
Commercial real estate construction and land developmentCommercial real estate construction and land developmentCommercial real estate construction and land development2,0971,9444,041
1-4 family residential (including home equity)1-4 family residential (including home equity)32299714921-4 family residential (including home equity)657657
Residential constructionResidential constructionResidential construction551,1732371,465
Consumer and otherConsumer and otherConsumer and other
TotalTotal$— $2,212 $— $— $— $71 $2,382 
Three Months Ended March 31, 2023
Interest Rate ReductionTerm ExtensionPayment DelayPrincipal forgivenessCombination Term Extension and Principal ForgivenessCombination Term Extension and Payment DelayTotal
(In thousands)
Commercial and industrial$96 $2,251 $— $— $— $— $2,347 
Real estate:
Commercial real estate (including multi-family residential)— 798 — — — 798 
Commercial real estate construction and land development— — — — — — — 
1-4 family residential (including home equity)— 725 — — — — 725 
Residential construction— — — — — — — 
Consumer and other— — — — — — — 
Total$96 $3,774 $— $— $— $— $3,870 

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Nine Months Ended September 30, 2023
Interest Rate ReductionTerm ExtensionPayment DelayPrincipal forgivenessCombination Term Extension and Principal ForgivenessCombination Term Extension and Payment DelayTotal
(In thousands)
Commercial and industrial$89 $2,185 $— $— $— $260 $2,534 
Real estate:
Commercial real estate (including multi-family residential)— 2,670 — — — 1,703 4,373 
Commercial real estate construction and land development— 6,850 — — — — 6,850 
1-4 family residential (including home equity)— 1,037 99 — — 71 1,207 
Residential construction— — — — — — — 
Consumer and other— 94 — — — — 94 
Total$89 $12,836 $99 $— $— $2,034 $15,058 

The following table summarizes, by loan portfolio, the financial effect of the Company's loan modifications for the three and nine months ended September 30, 2023:periods indicated:
Three Months Ended September 30, 2023Nine Months Ended September 30, 2023
Weighted Average Interest Rate ReductionWeighted Average Term ExtensionWeighted Average Interest Rate ReductionWeighted Average Term Extension
(months)(months)
Commercial and industrial— %2.0 %12
Real estate:
Commercial real estate (including multi-family residential)— %6— %9
Commercial real estate construction and land development— %— %12
1-4 family residential (including home equity)1.5 %241.5 %16
Residential construction— %— %
Consumer and other— %— %7

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Three Months Ended March 31, 2024Three Months Ended March 31, 2023
Weighted-Average Interest Rate ReductionWeighted-Average Term ExtensionWeighted-Average Interest Rate ReductionWeighted-Average Term Extension
(months)(months)
Commercial and industrial— %4— %29
Real estate:
Commercial real estate (including multi-family residential)— %— %6
Commercial real estate construction and land development— %5— %
1-4 family residential (including home equity)— %— %12
Residential construction— %6— %
Consumer and other— %— %
The following table summarizes modified loans that had a payment default withinduring the past twelve months ended March 31, 2024:
Term ExtensionPayment DelayCombination Term Extension and Payment Delay
(In thousands)
Commercial and industrial$142 $— $— 
Real estate:
Commercial real estate (including multi-family residential)
Commercial real estate construction and land development1,727
1-4 family residential (including home equity)69
Residential construction1,173
Consumer and other92
$1,961 $1,173 $69 
There were no loans that had payment defaults during the three months ended March 31, 2023 that were modified due to the borrowers experiencing financial difficulty during the three and nine months ended September 30, 2023:in that period prior to default.
Interest Rate ReductionTerm ExtensionPayment DelayPrincipal forgiveness
(In thousands)
Commercial and industrial$89 $670 $— $— 
Real estate:
Commercial real estate (including multi-family residential)
Commercial real estate construction and land development
1-4 family residential (including home equity)71599
Residential construction
Consumer and other
$89 $1,385 $99 $— 
The following table presents information regarding loans modified in a troubled debt restructuring during the three and nine months ended September 30, 2022:
Three Months Ended September 30, 2022Nine Months Ended September 30, 2022
Number of ContractsPre-modifications of Outstanding Recorded InvestmentPost-modifications of Outstanding Recorded InvestmentNumber of ContractsPre-modifications of Outstanding Recorded InvestmentPost-modifications of Outstanding Recorded Investment
(Dollars in thousands)
Troubled Debt Restructurings
Commercial and industrial$224 $224 4$768 $768 
Real estate:
Commercial real estate (including multi-family residential)— — 41,2071,207
Consumer and other145 45 14545
Total$269 $269 $2,020 $2,020 
Troubled debt restructurings resulted in no charge-offs during the nine months ended September 30, 2022. There were no loans modified under a trouble debt restructuring during the previous twelve-month period that subsequently defaulted during the nine-month period ended September 30, 2022. Default is determined to at 90 or more days past due. The trouble debt restructurings related to extending the amortization periods of the loans. The Company did not grant principal reductions on any restructured loans during the nine months ended September 30, 2022. There were no commitmentsCommitments to lend additional amounts to borrowers with trouble debt restructuredwhose loans forwere modified in the three and ninetwelve months ended September 30, 2022.March 31, 2024 totaled $1.4 million.
6.5. LEASES
Lease payments over the expected term are discounted using the Company’s incremental borrowing rate for borrowings of similar terms. Generally, the Company cannot be reasonably certain about whether or not it will renew a lease until such time as the lease is within the last two years of the existing lease term. When the Company is reasonably certain that a renewal option will be exercised, it measures/remeasures the right-of-use asset and related lease liability using the lease payments specified for the renewal period or, if such amounts are unspecified, the Company generally assumes an increase (evaluated on a case-by-case basis in light of prevailing market conditions) in the lease payment over the final period of the existing lease term.

There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the nine months ended September 30, 2023 and 2022.
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At September 30, 2023,March 31, 2024, the Company had 31 operating leases consisting of branch locations, office facilities and office space. On the September 30, 2023 balance sheet, theequipment. The right-of-use asset is classified within premises and equipment and the lease liability is included in other liabilities.liabilities on the balance sheet. The Company also owns certain office facilities which it leases to outside parties under operating lessor leases; however, such leases are not significant. AllThere were no sale and leaseback transactions, leveraged leases were classified as operating leases. Leasesor lease transactions with an initial term of 12related parties during the three months or less are not recorded on the balance sheetended March 31, 2024 and the related lease expense is recognized on a straight-line basis over the lease term.
Certain leases include options to renew, with renewal terms that can extend the lease term from one to five years. Lease assets and liabilities include related options that are reasonably certain of being exercised. The depreciable life of leased assets are limited by the expected lease term.
Supplemental lease information at the dates indicated is as follows:
September 30, 2023December 31, 2022
(Dollars in thousands)
Balance Sheet:
Operating lease right of use asset classified as premises and equipment$20,483$23,538
Operating lease liability classified as other liabilities$20,225$23,136
Weighted average lease term, in years7.918.18
Weighted average discount rate4.14 %4.00 %
Lease costs for the dates indicated is as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(In thousands)
Income Statement:    
 Operating lease cost$1,885 $836 $5,280 $2,559 
 Short-term lease cost— 21 — 
    Total operating lease costs$1,893 $836 $5,301 $2,559 
A maturity analysis of the Company’s lease liabilities is as follows:
September 30, 2023December 31, 2022
(In thousands)
Lease payments due:
 Within one year$1,171 $4,634 
 After one but within two years4,137 4,121 
 After two but within three years3,681 3,684 
 After three but within four years3,125 3,132 
 After four but within five years2,914 2,918 
 After five years9,279 9,303 
 Total lease payments24,307 27,792 
 Less: discount on cash flows4,082 4,656 
 Total lease liability$20,225 $23,136 
2023.
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7.Supplemental lease information at the dates indicated was as follows:
March 31, 2024December 31, 2023
(Dollars in thousands)
Balance Sheet:
Operating lease right-of-use asset classified as premises and equipment$19,193$20,746
Operating lease liability classified as other liabilities$19,658$20,659
Weighted average lease term, in years7.637.67
Weighted average discount rate4.21 %4.17 %
Lease costs for the dates indicated was as follows:
Three Months Ended March 31,
20242023
(In thousands)
Income Statement:  
 Operating lease cost$1,943 $1,809 
 Short-term lease cost
    Total operating lease costs$1,949 $1,814 
The following table summarizes the contractual maturity of the Company’s lease liabilities as of the dates indicated below:
March 31, 2024December 31, 2023
(In thousands)
Lease payments due:
 Within one year$3,281 $4,428 
 After one but within two years4,191 3,978 
 After two but within three years3,667 3,430 
 After three but within four years3,469 3,227 
 After four but within five years3,294 3,047 
 After five years6,815 6,605 
 Total lease payments24,717 24,715 
 Less: discount on cash flows(5,059)(4,056)
 Total lease liability$19,658 $20,659 
6. FAIR VALUE
The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Fair value represents the estimated exchange price that would be received from selling an asset or paid to transfer a liability, otherwise known as an “exit price,” in the principal or most advantageous market available to the entity in an orderly transaction between market participants on the measurement date.
Fair Value Hierarchy
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company groups financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1—Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
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Level 2—Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3—Significant unobservable inputs that reflect management’s judgment and assumptions that market participants would use in pricing an asset or liability that are supported by little or no market activity.
The carrying amounts and estimated fair values of financial instruments that are reported on the balance sheet arewere as follows:
 September 30, 2023
Estimated Fair Value
Carrying
Amount
Level 1Level 2Level 3Total
(In thousands)
March 31, 2024 March 31, 2024
Carrying
Amount
Estimated Fair Value
Level 1Level 2Level 3Total
(In thousands)
Financial assetsFinancial assets
Cash and cash equivalents
Cash and cash equivalents
Cash and cash equivalentsCash and cash equivalents$302,272 $302,272 $— $— $302,272 
Available for sale securitiesAvailable for sale securities1,414,952 — 1,414,952 — 1,414,952 
Loans held for investment, net of allowanceLoans held for investment, net of allowance7,910,953 — — 7,615,073 7,615,073 
Accrued interest receivableAccrued interest receivable43,536 176 6,947 36,413 43,536 
Financial liabilitiesFinancial liabilities
DepositsDeposits$8,686,621 $— $8,677,026 $— $8,677,026 
Deposits
Deposits
Accrued interest payableAccrued interest payable7,612 — 7,612 — 7,612 
Borrowed fundsBorrowed funds323,981 — 323,998 — 323,998 
Subordinated debtSubordinated debt109,665 — 107,469 — 107,469 
 December 31, 2023
Carrying
Amount
Estimated Fair Value
Level 1Level 2Level 3Total
(In thousands)
Financial assets
Cash and cash equivalents$399,237 $399,237 $— $— $399,237 
Available for sale securities1,395,680 — 1,395,680 — 1,395,680 
Loans held for investment, net of allowance7,833,449 — — 7,627,962 7,627,962 
Accrued interest receivable44,244 118 6,716 37,410 44,244 
Financial liabilities
Deposits$8,873,467 $— $8,866,645 $— $8,866,645 
Accrued interest payable11,288 — 11,288 — 11,288 
Borrowed funds50,000 — 50,000 — 50,000 
Subordinated debt109,765 — 109,390 — 109,390 
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 December 31, 2022
Estimated Fair Value
Carrying
Amount
Level 1Level 2Level 3Total
(In thousands)
Financial assets
Cash and cash equivalents$371,705 $371,705 $— $— $371,705 
Available for sale securities1,807,586 — 1,807,586 — 1,807,586 
Loans held for investment, net of allowance7,661,571 — — 7,555,602 7,555,602 
Accrued interest receivable44,743 25 10,585 34,133 44,743 
Financial liabilities
Deposits$9,267,632 $— $9,256,141 $— $9,256,141 
Accrued interest payable2,098 — 2,098 — 2,098 
Borrowed funds63,925 — 63,999 — 63,999 
Subordinated debt109,367 — 107,910 — 107,910 
The following tables present fair values for assets and liabilities measured at fair value on a recurring basis.
March 31, 2024
Level 1Level 2Level 3Total
(In thousands)
Financial assets
 Available for sale securities:
U.S. government and agency securities$— $289,365 $— $289,365 
Municipal securities— 196,748 — 196,748 
Agency mortgage-backed pass-through securities— 412,005 — 412,005 
Agency collateralized mortgage obligations— 520,869 — 520,869 
Corporate bonds and other— 104,113 — 104,113 
Interest rate swaps— 7,370 — 7,370 
Credit risk participation agreements— — 13 13 
Total fair value of financial assets$— $1,530,470 $13 $1,530,483 
Financial liabilities
Interest rate swaps$— $7,370 $— $7,370 
Total fair value of financial liabilities$— $7,370 $— $7,370 
December 31, 2023
Level 1Level 2Level 3Total
(In thousands)
Financial assets
 Available for sale securities:
U.S. government and agency securities$— $297,418 $— $297,418 
Municipal securities— 204,059 — 204,059 
Agency mortgage-backed pass-through securities— 387,873 — 387,873 
Agency collateralized mortgage obligations— 398,117 — 398,117 
Corporate bonds and other— 108,213 — 108,213 
Interest rate swaps— 6,692 — 6,692 
Credit risk participation agreements— — 20 20 
Total fair value of financial assets$— $1,402,372 $20 $1,402,392 
Financial liabilities
Interest rate swaps$— $6,692 $— $6,692 
Total fair value of financial liabilities$— $6,692 $— $6,692 
There were no liabilitiestransfers between levels during the three months ended March 31, 2024 or 2023.
Certain assets, including purchase credit deteriorated and individually evaluated loans with allowances for credit losses and branch assets held for sale, are measured at fair value on a recurringnonrecurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances such as of September 30, 2023.
September 30, 2023
Level 1Level 2Level 3Total
(In thousands)
Financial assets
 Available for sale securities:
U.S. government and agency securities$— $393,408 $— $393,408 
Municipal securities— 219,116 — 219,116 
Agency mortgage-backed pass-through securities— 328,194 — 328,194 
Agency collateralized mortgage obligations— 365,878 — 365,878 
Corporate bonds and other— 108,356 — 108,356 
Interest rate swaps— — 10,218 10,218 
Credit risk participation agreements— — 10 10 
Total fair value of financial assets$— $1,414,952 $10,228 $1,425,180 
Financial liabilities
Interest rate swaps$— $— $10,218 $10,218 
Total fair value of financial liabilities$— $— $10,218 $10,218 
impairment. There were no liabilities
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December 31, 2022
Level 1Level 2Level 3Total
(In thousands)
Financial assets
 Available for sale securities:
U.S. government and agency securities$— $414,280 $— $414,280 
Municipal securities— 540,569 — 540,569 
Agency mortgage-backed pass-through securities— 328,801 — 328,801 
Agency collateralized mortgage obligations— 394,130 — 394,130 
Corporate bonds and other— 129,806 — 129,806 
Interest rate swaps— — 9,263 9,263 
Credit risk participation agreements— — 27 27 
Total fair value of financial assets$— $1,807,586 $9,290 $1,816,876 
Financial liabilities
Interest rate swaps$— $— $9,263 $9,263 
Total fair value of financial liabilities$— $— $9,263 $9,263 
There were no transfers between levels during the nine months ended September 30, 2023 or 2022.
Assets measured at fair value on a nonrecurring basis are summarized in the table below. There were no liabilities measured at fair value on a nonrecurring basis at September 30, 2023March 31, 2024 and December 31, 2022.2023. Assets measured on a nonrecurring basis for the periods noted are summarized in the table below.
 September 30, 2023
Level 1Level 2Level 3
(In thousands)
Loans:
Commercial and industrial$— $— $13,830 
Commercial real estate (including multi-family residential)— — 7,706 
Commercial real estate construction and land development— — 6,654 
1-4 family residential (including home equity)— — 2,776 
Consumer and other— — 88 
Branch assets held for sale5,852 — — 
 $5,852 $— $31,054 
 March 31, 2024
Level 1Level 2Level 3
(In thousands)
Loans:
Commercial and industrial$— $— $18,691 
Commercial real estate (including multi-family residential)— — 7,373 
Commercial real estate construction and land development— — 8,708 
1-4 family residential (including home equity)— — 4,997 
Residential construction— — 1,192 
Consumer and other— — 85 
$— $— $41,046 
 December 31, 2022
Level 1Level 2Level 3
(In thousands)
December 31, 2023 December 31, 2023
Level 1Level 2Level 3
(In thousands)
Loans:Loans:
Commercial and industrialCommercial and industrial$— $— $21,948 
Commercial and industrial
Commercial and industrial
Commercial real estate (including multi-family residential)Commercial real estate (including multi-family residential)— — 11,566 
Commercial real estate construction and land development
1-4 family residential (including home equity)
Consumer and other
Branch assets held for sale(1)
1-4 family residential (including home equity)— — 2,883 
Branch assets held for sale5,165 — — 
$5,165 $— $36,397 
(1) Branch assets held for sale includeare banking centers that have closed and are for sale.

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8.7. DEPOSITS
Time deposits that met or exceeded the Federal Deposit Insurance Corporation ("FDIC") insurance limit of $250,000 thousand at September 30, 2023March 31, 2024 and December 31, 20222023 were $560.2$542.3 million and $432.9$548.4 million, respectively.
Scheduled maturities of time deposits for the next five years are as follows (in thousands):
Within one year$1,399,2651,538,006 
After one but within two years85,04060,069 
Over three years19,58693,464 
Total$1,503,8911,691,539 
The Company had $579.0$786.6 million and $72.5$615.9 million of brokered deposits as of September 30, 2023March 31, 2024 and December 31, 2022,2023, respectively. There were no concentrations of deposits with any one depositor at September 30, 2023March 31, 2024 and December 31, 2022.2023.
9.8. DERIVATIVE INSTRUMENTS
Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship.
Derivatives not designated as hedges
The Company has outstanding interest rate swap contracts with certain customers and equal and offsetting interest rate swaps with other financial institutions entered into at the same time. These interest rate swap contracts are not designated as hedging instruments for mitigating interest rate risk. The objective of the transactions is to allow customers to effectively convert a variable rate loan to a fixed rate.

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In connection with each swap transaction, the Company agreed to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agreed to pay a third-party financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts are designed to offset each other and do not significantly impact the Company’s operating results except in certain situations where there is a significant deterioration in the customer’s credit worthiness or that of the counterparties. At September 30, 2023,March 31, 2024, management determined there was no such deterioration.

At September 30, 2023March 31, 2024 and December 31, 2022,2023, the Company had 1514 and 1415 interest rate swap agreements outstanding with borrowers and financial institutions, respectively. These derivative instruments are not designated as accounting hedges and changes in the net fair value are recognized in other noninterest income. Fair value amounts are included in other assets and other liabilities.

At September 30, 2023March 31, 2024 and December 31, 2022,2023 the Company had three credit risk participation agreements with another financial institution that are associated with interest rate swaps related to loans for which the Company is the lead agent bank and the other financial institution provides credit protection to the Company should the borrower fail to perform under the terms of the interest rate swap agreements. The fair value of the agreements is determined based on the market value of the underlying interest rate swaps adjusted for credit spreads and recovery rates.

Derivative instruments not designated as hedges outstanding as of the periods indicated below were as follows (dollars in thousands):

March 31, 2024
Weighted
Average
NotionalFairMaturity
ClassificationAmountsValueFixed RateFloating Rate(Years)
Interest rate swaps:
Financial institutionsOther assets$103,805 $7,011 88563.25% - 5.58%SOFR CME 1M + 2.50% - 3.00%4.26
Financial institutionsOther assets4,880 359 -88564.99%U.S. Prime3.71
CustomersOther liabilities4,880 (359)24.99%U.S. Prime3.71
CustomersOther liabilities103,805 (7,011)253.25% - 5.58%SOFR CME 1M + 2.50% - 3.00%4.26
Credit risk participation agreements:
Financial institutionsOther assets$20,557 $13 3.50% - 5.40%SOFR CME 1M + 2.50%7.07


December 31, 2023
Weighted
Average
NotionalFairMaturity
ClassificationAmountsValueFixed RateFloating Rate(Years)
Interest rate swaps:
Financial institutionsOther assets$104,930 $6,367 3.25% - 5.58%SOFR CME 1M + 2.50% - 3.00%4.51
Financial institutionsOther assets4,911 295 4.99%U.S. Prime3.96
CustomersOther assets4,875 30 6.25%SOFR CME 1M + 2.50%4.04
Financial institutionsOther liabilities4,875 (30)6.25%SOFR CME 1M + 2.50%4.04
CustomersOther liabilities4,911 (295)4.99%U.S. Prime3.96
CustomersOther liabilities104,930 (6,367)3.25% - 5.58%SOFR CME 1M + 2.50% - 3.00%4.51
Credit risk participation agreements:
Financial institutionsOther assets$20,758 $20 3.50% - 5.40%SOFR CME 1M + 2.50%7.33
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Derivative instruments not designated as hedges outstanding as of September 30, 2023 were as follows (dollars in thousands):

Weighted
Average
NotionalFairMaturity
ClassificationAmountsValueFixed RateFloating Rate(Years)
Interest rate swaps:
Financial institutionsOther assets$110,946 $9,758 3.25% - 6.25%SOFR CME 1M + 2.50% - 3.00%4.74
Financial institutionsOther assets4,940 460 4.99%U.S. Prime4.21
CustomersOther liabilities4,940 (460)4.99%U.S. Prime4.21
CustomersOther liabilities110,946 (9,758)3.25% - 6.25%SOFR CME 1M + 2.50% - 3.00%4.74
Credit risk participations:
Financial institutionsOther assets20,958 10 3.50% - 5.40%SOFR CME 1M + 2.50%7.58

Derivative instruments not designated as hedges outstanding as of December 31, 2022 were as follows (dollars in thousands):

Weighted
Average
NotionalFairMaturity
ClassificationAmountsValueFixed RateFloating Rate(Years)
Interest rate swaps:
Financial institutionsOther assets$109,242 $8,856 3.25% - 5.58%SOFR CME 1M + 2.50% - 3.00%5.49
Financial institutionsOther assets5,029 407 4.99%U.S. Prime4.96
CustomersOther liabilities5,029 (407)4.99%U.S. Prime4.96
CustomersOther liabilities109,242 (8,856)3.25% - 5.58%SOFR CME 1M + 2.50%5.49
Credit risk participations:
Financial institutionsOther assets13,028 3.50%LIBOR 1M + 2.50%7.24
Financial institutionsOther assets8,485 25 5.35% - 5.40%SOFR CME 1M + 2.50%9.97
10.9. BORROWINGS AND BORROWING CAPACITY
The Company has an available line of credit with the Federal Home Loan Bank (“FHLB”) of Dallas, which allows the Company to borrow on a collateralized basis. FHLB advances are used to manage liquidity as needed. The advances are secured by a blanket lien on certain loans. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits. At September 30, 2023,March 31, 2024, the Company had a total borrowing capacity with the FHLB of $3.82$3.52 billion, of which $2.28$2.14 billion was available under this agreement and $1.54$1.38 billion was outstanding in/throughpursuant to FHLB advances and letters of credit. There were $324.0$215.0 million of FHLB short-term advances outstanding at September 30, 2023March 31, 2024 at a weighted-average rate of 5.62%5.60%.
Letters of credit were $1.22$1.17 billion at September 30, 2023, of which $50.8 million will expire during the remaining months of 2023, $72.8 millionMarch 31, 2024 and will expire in 2024, $494.5 million will expire in 2025, $57.3 million will expire in 2026, $448.0 million will expire in 2027, $40.0 million will expire in 2028, $27.0 million will expire in 2029 and $30.0 million will expire in 2031.the following periods (in thousands):
2024$310,280 
2025296,200 
202657,300 
2027402,500 
Thereafter100,000 
Total$1,166,280 
On December 13, 2022, the Company entered into a loan agreement with another financial institution, or the (“Loan Agreement,Agreement”) that provides for a $75.0 million revolving line of credit. At September 30, 2023,March 31, 2024, there were no outstanding borrowings on this line of credit and the Company did not draw on this line of credit during 20232024 or 2022.2023. The Company can make draws on the line
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of credit for a period of 24 months, which began on December 13, 2022, after which the Company will not be permitted to make further draws.draws and the outstanding balance will amortize over a period of 60 months. Interest accrues on outstanding borrowings at a per annum rate equal to the prime rate quoted by The Wall Street Journal and with a floor rate of 3.50% calculated in accordance with the terms of the revolving promissory note and payable quarterly through the first 24 months. The entire outstanding balance and unpaid interest is payable in full on December 13, 2024.
The Company may prepay the principal amount of the line of credit without premium or penalty. The obligations of the Company under the Loan Agreement are secured by a pledge of all the issued and outstanding shares of capital stock of Stellar Bank.
Covenants made under the Loan Agreement include, among other things, while there anyare obligations outstanding under Loan Agreement, the Company shall maintain a cash flow to debt service (as defined in the Loan Agreement) of not less than 1.25, the Bank’s Texas Ratio (as defined in the Loan Agreement) not to exceed 25.0%, and the Bank shall maintain a Tier 1 Leverage Ratio (as defined under the Loan Agreement) of at least 7.0% and restrictions on the ability of the Company and its subsidiaries to incur certain additional debt. As of September 30, 2023,March 31, 2024, the Company believes it was in compliance with all such debt covenants and had not been made aware of any noncompliance by the lender.
11.10. SUBORDINATED DEBT
Junior Subordinated Debentures
In connection with the acquisition of F&M Bancshares, Inc., in 2015, the Company assumed Farmers & Merchants Capital Trust II and Farmers & Merchants Capital Trust III. Each of thesethe trusts is a capital or statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in the Company’s junior subordinated debentures. The preferred trust securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are wholly owned by the Company. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of the Company’s present and future senior indebtedness. The Company has fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by sucheach trust to the extent not paid or made by such trust, provided such trust has funds available for such obligations. The trust preferred securities bear a floating rate of interest equal to 3-Month SOFR plus a spread adjustment. The junior subordinated debentures are included in Tier 1 capital under current regulatory guidelines and interpretations. Under the provisions of each issue of the debentures, the Company has the right to defer payment of interest on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on
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either issue of the debentures are deferred, the distributions on the applicable trust preferred securities and common securities will also be deferred.
A summary of pertinent information related to the Company’s issues of junior subordinated debentures outstanding at September 30, 2023March 31, 2024 is set forth in the table below:
Description
Issuance
Date
Trust
Preferred
Securities
Outstanding
Interest Rate
Junior
Subordinated
Debt Owed
to Trusts
Maturity
Date(1)
(Dollars in thousands)
Farmers & Merchants Capital Trust IINovember 13, 2003$7,500 3-Month SOFR + 3.26%$7,732 November 8, 2033
Farmers & Merchants Capital Trust IIIJune 30, 20053,500 3-Month SOFR + 2.06%3,609 July 7, 2035
 $11,341 
(1)All debentures are currently callable.
Description
Issuance
Date
Trust
Preferred
Securities
Outstanding
Junior
Subordinated
Debt Owed
to Trusts
Maturity
Date(1)
(Dollars in thousands)
Farmers & Merchants Capital Trust IINovember 13, 2003$7,500 $7,732 November 8, 2033
Farmers & Merchants Capital Trust IIIJune 30, 20053,500 3,609 July 7, 2035
 $11,341 
(1) All junior subordinated debentures were callable at March 31, 2024.
Subordinated Notes
In December 2017, the Bank completed the issuance, through a private placement, ofissued $40.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the "Bank Notes"“Bank Notes”) due December 15, 2027. As of December 15, 2022, theThe Bank Notes borebear a floating rate of interest equal to 3-Month LIBOR plus 3.03%, which transitioned to 3-Month SOFR plus a comparable spread adjustment immediately after June 30, 2023, until the Bank Notes mature on December 15, 2027, or such earlier redemption date, payable quarterly in arrears. The Bank Notes are redeemable by the Bank, in whole or in part on or after December 15, 2022 or in whole but not in part, upon the occurrence of certain specified tax events, capital events or investment company events. Any redemption will be at a redemption price equal to 100% of the principal amount of Bank Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Bank Notes are not subject to redemption at the
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option of the holders. The Bank Notes are eligible for Tier 2 capital treatment, however, during the last five years of the instrument, the amount eligible must be reduced by 20% of the original amount annually and that no amount of the instrument is eligible for inclusion in Tier 2 capital when the remaining maturity of the instrument is less than one year. As the Bank Notes wereare within five years of maturity, only 80%60% of the notes are eligible for Tier 2 capital treatment at September 30, 2023.March 31, 2024.

In September 2019, the Company completed the issuance ofissued $60.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the "Company Notes"“Company Notes”) due October 1, 2029. The Company Notes bear a fixed interest rate of 4.70% per annum until (but excluding) October 1, 2024, payable semi-annually in arrears on April 1 and October 1, commencing on April 1, 2020. Thereafter, from October 1, 2024 through the maturity date, October 1, 2029, or earlier redemption date, the Company Notes will bear interest at a floating rate equal to the then-current 3-Month SOFR, plus 3.13%, which transitioned from LIBOR immediately after June 30, 2023, for each quarterly interest period, payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year. Any redemption will be at a redemption price equal to 100% of the principal amount of Company Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Company Notes are not subject to redemption at the option of the holders.
12.11. INCOME TAXES
The amount of the Company’s federal and state income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other nondeductible items.
Three Months EndedNine Months Ended
September 30, 2023September 30, 2022September 30, 2023September 30, 2022
Three Months Ended
Three Months Ended
Three Months Ended
March 31, 2024
March 31, 2024
March 31, 2024
Income tax expense
Income tax expense
Income tax expenseIncome tax expense$7,445 $3,406 $24,825 $11,310 
Effective income tax rateEffective income tax rate19.4 %19.3 %19.4 %18.6 %
Effective income tax rate
Effective income tax rate
Interest and penalties related to tax positions are recognized in the period in which they begin accruing or when the entity claims the position that does not meet the minimum statutory thresholds. The Company does not have any uncertain tax positions and does not have any interest or penalties recorded in the income statement for the three or nine months ended September 30, 2023.March 31, 2024.
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12. STOCK BASED COMPENSATION
In connection with the closing of the Merger on October 1, 2022,Under the 2022 Omnibus Incentive Plan (the “2022 Plan”) approved by the Company’s shareholders at the special meeting of shareholders on May 23, 2022 became effective. Under the 2022 Plan, the Company is authorized to issue a maximum aggregate of 2,000,000 shares of common stock. All restricted stock and performance share awards outstanding at September 30, 2023March 31, 2024 were issued under the 2022 Plan. At September 30, 2023,March 31, 2024, there were 1,017,319770,505 shares reserved and available for issuance under the 2022 Plan.
The Company accounts for stock based employee compensation plans using the fair value-based method of accounting. The Company recognized total stock based compensation expense of $2.8 million and $969 thousand$2.6 million for the three months ended September 30,March 31, 2024 and 2023, and 2022, respectively, and $8.2 million and $2.9 million for the nine months ended September 30, 2023 and 2022, respectively.
Stock Options
Stock options outstanding at September 30, 2023,March 31, 2024, were issued prior to the Merger under three equity compensation plans (1) the Allegiance 2015 Stock Awardsthat are no longer active and Incentive Plan, (2) the Allegiance 2019 Amended and Restated Stock Awards and Incentive Plan and (3) the CBTX 2014 Stock Option Plan. Nono additional shares may be issued under these compensation plans.
No options to purchase Company stock were granted Stock option activity during the ninethree months ended September 30, 2023. Options are exercisable for up to 10 years from the date of the grant and, dependent on the terms of the applicable award agreement generally vest three to four years after the date of grant. The fair value of stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model.March 31, 2024 was as follows:
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A summary of the activity in the stock option plans during the nine months ended September 30, 2023 is set forth below:
Number of
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value
(Shares in thousands) (In years)(Dollars in thousands)
Options outstanding, January 1, 2023368$17.89 2.72$4,256 
Number of
Options
Number of
Options
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value
(In thousands)(In thousands) (In years)(In thousands)
Options outstanding, January 1, 2024
Options grantedOptions granted— 
Options exercisedOptions exercised(49)14.19 
Options exercised
Options exercised
Options forfeitedOptions forfeited(36)20.67 
Options outstanding, September 30, 2023283$18.18 2.17$1,036 
Options vested and exercisable, September 30, 2023283$18.18 2.17$1,036 
Options forfeited
Options forfeited
Options outstanding, March 31, 2024
Options outstanding, March 31, 2024
Options outstanding, March 31, 2024
Options vested and exercisable, March 31, 2024
Restricted Stock Awards
The fair value of the Company’s restricted stock awards is estimated based on the market value of the Company’s common stock at the date of grant, which is the closing price of the Company’s common stock on the day before the grant date. The shares of restricted stock granted during 20232024 generally vest over a period of two or three years from the date of grant and the Company accounts for shares of restricted stock by recording the fair value of the grant on the award date as compensation expense over the vesting period.
Shares of restricted stock are considered outstanding at the date of issuance as the grantee becomes the record owner of the restricted stock and has voting, dividend and other shareholder rights. The shares of restricted stock are non-transferable and subject to forfeiture until the restricted stock awards vest and any dividends with respect to the restricted stock awards are subject to the same restrictions, including the risk of forfeiture.
A summary of the activity of the nonvested Nonvested shares of restricted stock activity during the ninethree months ended September 30, 2023 isMarch 31, 2024 was as follows:
Number of
Shares
Weighted
Average Grant
Date Fair Value
(Shares in thousands)
Nonvested share awards outstanding, January 1, 2023501$32.84 
Number of
Shares
Number of
Shares
Weighted-
Average Grant
Date Fair Value
(In thousands)
Nonvested share awards outstanding, January 1, 2024
Nonvested share awards outstanding, January 1, 2024
Nonvested share awards outstanding, January 1, 2024
Share awards grantedShare awards granted26225.67 
Share awards vestedShare awards vested(14)25.99 
Unvested share awards forfeited or cancelledUnvested share awards forfeited or cancelled(64)31.03 
Nonvested share awards outstanding, September 30, 202368530.41 
Nonvested share awards outstanding, March 31, 2024
As of September 30, 2023,March 31, 2024, there was $13.1$16.1 million of total unrecognized compensation costexpense related to the restricted stock awards which is expected to be recognized over a weighted-average period of 1.702.04 years.
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Performance Share Awards ("PSAs"(PSAs)
PSAs are generally earned subject to certain performance goals being met after the two-year performance period and will be settled in shares of Company common stock following a one-year service period. There were 119,84577,624 PSAs awarded during the ninethree months ended September 30, 2023.March 31, 2024. The grant date fair value of the PSAs is based on the probable outcome of the applicable performance conditions and is calculated at target based on a combination of the closing market price of our common stock on the grant date and a Monte Carlo simulated fair value in accordance with ASC 718. At September 30, 2023,March 31, 2024, there was $2.0$2.2 million of unrecognized compensation expense related to the PSAs, which is expected to be recognized over a weighted-average period of 2.02.14 years.
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14.13. OFF-BALANCE SHEET ARRANGEMENTS, COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into various transactions, which, in accordance with accounting principles generally accepted in the United States are not included in the Company’s consolidated balance sheets. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.
The contractual amounts of financial instruments with off-balance sheet risk are as follows:
September 30, 2023December 31, 2022
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
(In thousands)
Commitments to extend credit(1)
$432,498 $1,454,648 $673,098 $1,686,627 
March 31, 2024March 31, 2024December 31, 2023
Fixed
Rate
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
(In thousands)(In thousands)
Commitments to extend credit
Standby letters of creditStandby letters of credit14,507 23,249 10,310 25,190 
TotalTotal$447,005 $1,477,897 $683,408 $1,711,817 
1)    At September 30, 2023March 31, 2024 and December 31, 2022,2023, the Company had FHLB Lettersletters of Creditcredit in the amount of $1.22$1.17 billion and $1.08$1.82 billion, respectively, pledged as collateral for public and other deposits of state and local government agencies. For more information on FHLB borrowings, see Note 109 Borrowings and Borrowing Capacity.
Commitments to Extend Credit
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed do not necessarily represent future cash funding requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses. The amount and type of collateral, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer.
Commitments to make loans are generally made for an approval period of 120 days or fewer.less. As of September 30, 2023,March 31, 2024, the fixed rate loan commitments had interest rates ranging from 1.70%1.80% to 13.50% with a weighted average maturity of 2.28 years and a weighted-average rate of 2.46 years and 6.28%, respectively.6.59%.
Standby Letters of Credit
Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, the Company has the rights to the underlying collateral. The credit risk to the Company in issuing letters of credit is substantially similar to that involved in extending loan facilities to its customers. The Company’s policy for obtaining collateral, and the nature of such collateral, is substantially similar to that involved in making commitments to extend credit.
Litigation
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The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business. Based on information presently available and advice received from legal counsel representing the Company, it is the opinion of management that the disposition or ultimate determination of such claims and lawsuits will not have a material adverse effect on the financial position or results of operations of the Company.
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15.14. REGULATORY CAPITAL MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines, and for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities and certain off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can cause regulators to initiate actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. The final rules implementing Basel Committee on Banking Supervision's capital guideline for U.S. Banks (Basel III Rules) were fully phased in when the capital conservation buffer reached 2.5%. Management believes as of September 30, 2023March 31, 2024 and December 31, 2022,2023, the Company and the Bank met all capital adequacy requirements to which they were then subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If less than well capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.
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Based on the ratios presented below, the Company’s and the Bank’s capital ratios as of March 31, 2024 exceed the minimum levels necessary to be considered “well-capitalized” under the prompt corrective action regulatory framework. The following is a summary of the Company’s and the Bank’s actual and required capital ratios as of September 30, 2023March 31, 2024 and December 31, 2022:2023:
Actual
Minimum Required for Capital
Adequacy Purposes
Minimum Required Plus
Capital Conservation Buffer
To Be Categorized As Well-Capitalized Under
Prompt Corrective Action Provisions
AmountRatioAmountRatioAmountRatioAmountRatio
(Dollars in thousands)
ActualActual
Minimum Required for Capital
Adequacy Purposes
Minimum Required Plus
Capital Conservation Buffer
To Be Categorized As Well-Capitalized Under
Prompt Corrective Action Provisions
AmountAmountRatioAmountRatioAmountRatioAmountRatio
(Dollars in thousands)(Dollars in thousands)
STELLAR BANCORP, INC.STELLAR BANCORP, INC.
(Consolidated)(Consolidated)
September 30, 2023
(Consolidated)
(Consolidated)
March 31, 2024
March 31, 2024
March 31, 2024
Total Capital (to risk-weighted
assets)
Total Capital (to risk-weighted
assets)
Total Capital (to risk-weighted
assets)
Total Capital (to risk-weighted
assets)
$1,201,404 13.42 %$716,402 8.00 %$940,278 10.50 %N/AN/A$1,252,365 14.62 14.62 %$685,412 8.00 8.00 %$899,603 10.50 10.50 %N/A
Common Equity Tier 1 Capital (to
risk-weighted assets)
Common Equity Tier 1 Capital (to
risk-weighted assets)
997,556 11.14 %402,976 4.50 %626,852 7.00 %N/AN/A
Common Equity Tier 1 Capital (to
risk-weighted assets)
1,053,055 12.29 12.29 %385,544 4.50 4.50 %599,735 7.00 7.00 %N/A
Tier 1 Capital (to risk-weighted
assets)
Tier 1 Capital (to risk-weighted
assets)
1,007,454 11.25 %537,302 6.00 %761,177 8.50 %N/AN/A
Tier 1 Capital (to risk-weighted
assets)
1,062,953 12.41 12.41 %514,059 6.00 6.00 %728,250 8.50 8.50 %N/A
Tier 1 Leverage (to average tangible
assets)
Tier 1 Leverage (to average tangible
assets)
1,007,454 9.82 %410,344 4.00 %410,344 4.00 %N/AN/A
Tier 1 Leverage (to average tangible
assets)
1,062,953 10.41 10.41 %408,273 4.00 4.00 %408,273 4.00 4.00 %N/A
December 31, 2022
December 31, 2023
Total Capital (to risk-weighted
assets)
Total Capital (to risk-weighted
assets)
Total Capital (to risk-weighted
assets)
Total Capital (to risk-weighted
assets)
$1,092,618 12.39 %$705,765 8.00 %$926,317 10.50 %N/AN/A$1,221,060 14.02 14.02 %$696,529 8.00 8.00 %$914,195 10.50 10.50 %N/A
Common Equity Tier 1 Capital (to
risk-weighted assets)
Common Equity Tier 1 Capital (to
risk-weighted assets)
885,652 10.04 %396,993 4.50 %617,545 7.00 %N/AN/A
Common Equity Tier 1 Capital (to
risk-weighted assets)
1,025,076 11.77 11.77 %391,798 4.50 4.50 %604,463 7.00 7.00 %N/A
Tier 1 Capital (to risk-weighted
assets)
Tier 1 Capital (to risk-weighted
assets)
895,520 10.15 %529,324 6.00 %749,876 8.50 %N/AN/A
Tier 1 Capital (to risk-weighted
assets)
1,034,974 11.89 11.89 %522,397 6.00 6.00 %740,062 8.50 8.50 %N/A
Tier 1 Leverage (to average tangible
assets)
Tier 1 Leverage (to average tangible
assets)
895,520 8.55 %418,720 4.00 %418,720 4.00 %N/AN/A
Tier 1 Leverage (to average tangible
assets)
1,034,974 10.18 10.18 %406,859 4.00 4.00 %406,859 4.00 4.00 %N/A
STELLAR BANKSTELLAR BANK
September 30, 2023
March 31, 2024
March 31, 2024
March 31, 2024
Total Capital (to risk-weighted
assets)
Total Capital (to risk-weighted
assets)
Total Capital (to risk-weighted
assets)
Total Capital (to risk-weighted
assets)
$1,174,693 13.13 %$715,650 8.00 %$939,290 10.50 %$894,562 10.00 %$1,208,772 14.13 14.13 %$684,604 8.00 8.00 %$898,542 10.50 10.50 %$855,755 10.00 10.00 %
Common Equity Tier 1 Capital (to
risk-weighted assets)
Common Equity Tier 1 Capital (to
risk-weighted assets)
1,040,743 11.63 %402,553 4.50 %626,193 7.00 %581,465 6.50 %
Common Equity Tier 1 Capital (to
risk-weighted assets)
1,079,360 12.61 12.61 %385,090 4.50 4.50 %599,028 7.00 7.00 %556,240 6.50 6.50 %
Tier 1 Capital (to risk-weighted
assets)
Tier 1 Capital (to risk-weighted
assets)
1,040,743 11.63 %536,737 6.00 %760,378 8.50 %715,650 8.00 %
Tier 1 Capital (to risk-weighted
assets)
1,079,360 12.61 12.61 %513,453 6.00 6.00 %727,391 8.50 8.50 %684,604 8.00 8.00 %
Tier 1 Leverage (to average tangible
assets)
Tier 1 Leverage (to average tangible
assets)
1,040,743 10.15 %409,957 4.00 %409,957 4.00 %512,446 5.00 %
Tier 1 Leverage (to average tangible
assets)
1,079,360 10.59 10.59 %407,853 4.00 4.00 %407,853 4.00 4.00 %509,816 5.00 5.00 %
December 31, 2022
December 31, 2023
Total Capital (to risk-weighted
assets)
Total Capital (to risk-weighted
assets)
Total Capital (to risk-weighted
assets)
Total Capital (to risk-weighted
assets)
$1,059,313 12.02 %$705,120 8.00 %$925,470 10.50 %$881,400 10.00 %$1,186,710 13.65 13.65 %$695,746 8.00 8.00 %$913,167 10.50 10.50 %$869,683 10.00 10.00 %
Common Equity Tier 1 Capital (to
risk-weighted assets)
Common Equity Tier 1 Capital (to
risk-weighted assets)
921,714 10.46 %396,630 4.50 %616,980 7.00 %572,910 6.50 %
Common Equity Tier 1 Capital (to
risk-weighted assets)
1,060,624 12.20 12.20 %391,357 4.50 4.50 %608,778 7.00 7.00 %565,294 6.50 6.50 %
Tier 1 Capital (to risk-weighted
assets)
Tier 1 Capital (to risk-weighted
assets)
921,714 10.46 %528,840 6.00 %749,190 8.50 %705,120 8.00 %
Tier 1 Capital (to risk-weighted
assets)
1,060,624 12.20 12.20 %521,810 6.00 6.00 %739,231 8.50 8.50 %695,746 8.00 8.00 %
Tier 1 Leverage (to average tangible
assets)
Tier 1 Leverage (to average tangible
assets)
921,714 8.81 %418,388 4.00 %418,388 4.00 %522,984 5.00 %
Tier 1 Leverage (to average tangible
assets)
1,060,624 10.44 10.44 %406,453 4.00 4.00 %406,453 4.00 4.00 %508,066 5.00 5.00 %

Dividend Restrictions

The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. In addition, the Company’s credit agreement with another financial institution also limits its ability to pay dividends. Under applicable banking regulations, the amount of dividends that may be paid by the Bank in any calendar year is limited to the current year’s net profits combined with the retained net profits of the preceding two years, subject to the capital requirements described above.
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16.
15. EARNINGS PER COMMON SHARE
Diluted earnings per common share is computed using the weighted-average number of common shares determined for the basic earnings per common share computation plus the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock using the treasury stock method. Outstanding stock options issued by the Company represent the only dilutive effect reflected in diluted weighted average shares. Restricted shares and performance share awards are considered outstanding at the date of grant, accounted for as participating securities and included in basic and diluted weighted average common shares outstanding.
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
AmountPer Share
Amount
AmountPer Share
Amount
AmountPer Share
Amount
AmountPer Share
Amount
(Amounts in thousands, except per share data)
Three Months Ended March 31,
Three Months Ended March 31,
Three Months Ended March 31,
2024
2024
2024
Amount
Amount
Amount
(Amounts in thousands, except per share data)
(Amounts in thousands, except per share data)
(Amounts in thousands, except per share data)
Net income attributable to shareholders
Net income attributable to shareholders
Net income attributable to shareholdersNet income attributable to shareholders$30,908 $14,286 $103,231 $49,380 
Basic:Basic:
Basic:
Basic:
Weighted average shares outstanding
Weighted average shares outstanding
Weighted average shares outstandingWeighted average shares outstanding53,313 $0.58 28,286 $0.51 53,211 $1.94 28,679 $1.72 
Diluted:Diluted:
Diluted:
Diluted:
Add incremental shares for:
Add incremental shares for:
Add incremental shares for:Add incremental shares for:
Dilutive effect of stock option exercises and performance share unitsDilutive effect of stock option exercises and performance share units67 244 89 222 
Dilutive effect of stock option exercises and performance share units
Dilutive effect of stock option exercises and performance share units
TotalTotal53,380 $0.58 28,530 $0.50 53,300 $1.94 28,901 $1.71 
Total
Total
There were 28,372101,166 and no6,807 antidilutive shares as of September 30,March 31, 2024 and 2023, and 2022, respectively.
The basic and diluted weighted average number of shares issued and earnings per share have been retrospectively adjusted to reflect the equivalent number of shares issued to holders of Allegiance common stock in the Merger.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except where the context otherwise requires or where otherwise indicated in this Quarterly Report on Form 10-Q, the term “Stellar” refers to Stellar Bancorp, Inc., the terms “we,” “us,” “our,” “Company” and “our business” refer to Stellar Bancorp, Inc. and our wholly owned banking subsidiary, Stellar Bank, a Texas banking association.

Cautionary NoteNotice Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward‑looking statements. These forward‑looking statements reflect the Company’s current views with respect to, among other things, future events and the Company’s financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward‑looking nature. These forward‑looking statements are not historical facts, and are based on current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company’s control. Accordingly, the Company cautions that any such forward‑looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although the Company believes that the expectations reflected in these forward‑looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward‑looking statements.
There are or will be important factors that could cause the Company’s actual results to differ materially from those indicated in these forward‑looking statements, including, but not limited to, the risks described in “Part I— Item 1A.—Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20222023 and the following:

disruptions to the economy and the U.S. banking system caused by recent bank failures;
risks associated with uninsured deposits and responsive measures by federal or state governments or banking regulators, including increases in our deposit insurance assessments and other actions of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance CorporationFDIC and Texas Department of Banking and legislative and regulatory actions and reforms;
the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board;
inflation, interest rate, capital and securities markets and monetary fluctuations;
changes in the interest rate environment, the value of Stellar’sthe Company’s assets and obligations and the availability of capital and liquidity;
general competitive, economic, political and market conditions and other factors that may affect future results of the Company including changes in asset quality and credit risk; the inability to sustain revenue and earnings growth;
local, regional, national and international economic conditions and the impact they may have on the Company and our customers and the Company’s assessment of that impact;
the inability to sustain revenue and earnings growth;
impairment of the Company'sCompany’s goodwill or other intangible assets;
the composition of the Company’s loan portfolio and the concentration of loans in commercial real estate and commercial real estate construction;
the geographic concentration of the Company’s markets;market;
the accuracy and sufficiency of the assumptions and estimates the Company makes in establishing reserves for potential loan losses and other estimates;
the amount of nonperforming and classified assets that the Company holds and the time and effort necessary to resolve nonperforming assets;
deterioration of asset quality;
customer borrowing, repayment, investment and deposit practices;
the Company’s ability to maintain important deposit customer relationships;
changes in the value of collateral securing the Company’s loans;
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the risk that the expected cost savings and any revenue synergiesanticipated benefits from the Merger may not be fully realized or may take longer than anticipated to be realized;
the amount of the costs, fees, expenses and charges related to the Merger;
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reputational riskMerger and the reaction of our customers, suppliers, employees or other business partners to the Merger;integration;
natural disasters and adverse weather onin the Company’s market area;
the potential impact of climate change;
the impact of pandemics, epidemics or any other health-related crisis;
acts of terrorism, an outbreak of hostilities, such as the conflicts in Ukraine or the Middle East, or other international or domestic calamities;
the Company’s ability to maintain effective internal control over financial reporting;
the cost and effects of cyber incidents or other failures, interruptions or security breaches of the Company's systems or those of the Company'sCompany’s customers or third-party providers;
the failure of certain third- or fourth-party vendors to perform;
the impact, extent and timing of technological changes;
the institution and outcome of litigation and other legal proceedings against the Company or to which it may become subject;
the costs, effects and results of regulatory examinations, investigations, or reviews or the ability to obtain required regulatory approvals or meet conditions associated with the same;
changes in the laws, rules, regulations, interpretations or policies relating to financial institution, accounting, tax, trade, monetary and fiscal matters;
the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; and
other risks, uncertainties, and factors that are discussed from time to time in the Company’s reports and documents filed with the SEC.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Quarterly Report on Form 10-Q. If one or more events related to these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may differ materially from what is anticipated. Undue reliance should not be placed on any such forward‑looking statements. Any forward‑looking statement speaks only as of the date made, and the Company does not undertake any obligation to publicly update or review any forward‑looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible to predict which will arise. In addition, the Company cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward‑looking statements.
Overview
We generate most of our income from interest income on loans, interest income from investments in securities and service charges on customer accounts. We incur interest expense on deposits and other borrowed funds and noninterest expenses such as salaries and employee benefits and occupancy expenses. Net interest income is the difference between interest income on earning assets such as loans and securities and interest expense on liabilities such as deposits and borrowings that are used to fund those assets. Net interest income is our largest source of revenue. To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the interest expenses of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.
Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a “volume change.” Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Texas and specifically in our markets,market, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our marketsmarket and throughout the state of Texas.
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Our net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and borrowed funds, referred to as a “rate change.” Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets.
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Merger of Equals
Allegiance Bancshares, Inc. (“Allegiance”) merged with and into CBTX, Inc. (“CBTX”) with the surviving corporation renamed Stellar Bancorp, Inc. At the effective time of the Merger, each outstanding share of Allegiance common stock, par value of $1.00 per share, was converted into the right to receive 1.4184 shares of common stock of the Company. Immediately following the Merger, CommunityBank merged with and into Allegiance Bank with Allegiance Bank as the surviving bank. Allegiance Bank changed its name to Stellar Bank on February 18, 2023 in connection with the operational conversion. After the Merger, Stellar became one of the largest banks based in Houston, Texas.
The Merger constituted a business combination and was accounted for as a reverse merger using the acquisition method of accounting. As a result, Allegiance was the accounting acquirer and CBTX was the legal acquirer and the accounting acquiree. Accordingly, the historical financial statements of Allegiance became the historical financial statements of the combined company. In addition, the assets and liabilities of CBTX have been recorded at their estimated fair values and added to those of Allegiance as of October 1, 2022. The determination of fair value required management to make estimates about discount rates, expected future cash flows, market conditions and other future events. During the third quarter of 2023, the Company completed the final tax returns related to CBTX's business and operations through September 30, 2022. After completion of these tax returns, the Company increased income tax balances and goodwill in the amount of $58 thousand which finalized all purchase accounting adjustments for the Merger.
The Company’s results of operations for the three and nine months ended September 30, 2022 reflect Allegiance results, while the results for the three and nine months ended September 30, 2023 set forth the results of operations for the Company. The Merger had a significant impact on all aspects of the Company’s financial statements, and financial results for periods after the Merger are not comparable to financial results for periods prior to the Merger. The number of shares issued and outstanding, earnings per share, additional paid-in capital, dividends paid and all references to share quantities of the Company prior to the Merger have been retrospectively adjusted to reflect the equivalent number of shares issued to holders of Allegiance common stock in the Merger. See Note 2 – Acquisitions in the accompanying notes to the consolidated financial statements for the impact of the Merger.
Critical Accounting Policies
Certain of our accounting estimates are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances that could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that determining the allowance for credit losses is its most critical accounting estimate. Our accounting policies are discussed in detail in Note 1 –1– Nature of Operations and Summary of Significant Accounting and Reporting Policies in our Annual Report on Form 10-K for the year ended December 31, 2022.2023.
Allowance for Credit Losses

The allowance for credit losses is a valuation account which represents management’s best estimate of lifetime expected losses based on reasonable and supportable forecasts, historical loss experience, and other qualitative considerations. Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. The Company bases its estimates of credit losses on three primary components: (1) estimates of expected losses that exist in various segments of performing loans over the remaining life of the loan portfolio using a reasonable and supportable economic forecast, (2) specifically identified losses in individually analyzed credits which are collateral-dependent, which generally include nonaccrual loans internally graded as impaired and purchased credit deteriorated (“PCD”) loans and (3) qualitative factors related to economic conditions, portfolio concentrations, regulatory policy updates, and other relevant factors that address estimates of expected losses not fully addressed based upon management’s judgment of portfolio conditions. One of the most significant judgments used in determining the allowance for credit losses is the reasonable and supportable economic forecast.losses. Estimating the timing and amounts of future losses is subject to significant managementmanagement’s judgment as these projected cash flows rely upon the estimates discussed above and factors that are reflective of current or future expected conditions. The processes we use to estimate expected credit losses, calculate our allowance for credit losses and measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other measures of our financial condition and results of operations, depend upon the use ofconditions using analytical and forecasting models and tools. These models and tools reflect assumptions made by management. Volatility in certain credit metrics and differences between expected and actual outcomes are to be expected. CustomersFor example, customers may not repay their loans according to the original terms, and the collateral securing the payment of those loans may be insufficient to pay any remaining loan balance.

Loans with similar risk characteristics are aggregated into homogenous pools and are collectively evaluated by applying reserve factors, such as historical lifetime loss, concentration risk, volume, growth and composition of the loan portfolio, current and forecasted economic conditions to amortized cost balances over the remaining contractual life of the collectively evaluated portfolio. Historical lifetime loss is determined by utilizing an open-pool (“cumulative loss rate”) methodology, adjusted for credit risk characteristics and current and forecasted economic conditions. Losses are predicted over a reasonable and supportable period of one year for all loan pools, followed by an immediate reversion to long-term historical averages. The reasonable and supportable period and reversion period are re-evaluated as needed by the Company and are dependent on the current economic environment among other factors.

Loans that no longer share risk characteristics with the collectively evaluated loan pools are evaluated on an individual basis and are excluded from the collectively evaluated pools. In order to assess which loans are to be individually evaluated, the Company follows a loan review program to evaluate the credit risk in the total loan portfolio and assigns risk grades to each loan. Individual credit loss estimates are typically performed for nonaccrual loans, modified loans classified as troubled loan modifications and all other loans identified by management. All loans deemed as being individually evaluated are reviewed on a quarterly basis in order to determine whether a specific reserve is required. The Company considers certain loans to be collateral dependent if the borrower is experiencing financial difficulty and management expects repayment for the loan to be substantially through the operation or sale of the collateral. For collateral dependent loans, loss estimates are based on the fair value of collateral, less estimated cost to sell (if applicable). Collateral values supporting individually evaluated loans are assessed quarterly and appraisals are typically obtained at least annually. The Company allocates a specific loan loss reserve on an individual loan basis primarily based on the value of the collateral securing the individually evaluated loan. Through this loan review process, the Company assesses the overall quality of the loan portfolio and the adequacy of the allowance for credit losses on loans while considering risk elements attributable to particular loan types in assessing the quality of individual loans. In addition, for each category of loans, the Company considers secondary sources of income and the financial strength and credit history of the borrower and any guarantors.

A change in the allowance for credit losses on loans can be attributable to several factors, most notably historical lifetime loss, specific reserves for individually evaluated loans and changes in qualitative factors and growth within the loan portfolio. The estimated loan losses for all loan pools are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses to bring the allowance to the level management believes is appropriate based on factors that have not otherwise been fully
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accounted for, including adjustments for foresight risk, input imprecision and model imprecision. The allowance for credit losses includes the allowance for credit losses on loans, which is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans,qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management, but measured by objective measurements period over period. The data for each measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan portfolios. These adjustments are based upon quarterly trend assessments in portfolio concentrations, changes in lending policies and procedures, policy exceptions, independent loan review results, internal risk ratings and peer group credit quality trends. Additional qualitative considerations are made for any identified risk which did not exist within our portfolio historically and therefore may not be adequately addressed through evaluation of such risk factors based on historical portfolio trends. Qualitative adjustments also include current and forecasted economic conditions primarily measured by local and national economic metrics, such as GDP, unemployment rates, interest rates and oil and gas prices based on historical and forecasted economic research scenarios provided by industry-leading financial intelligence and analytical solutions, which the Company has subscribed to. The qualitative allowance allocation is increased or decreased for crediteach loan pool based on the assessment of these various qualitative factors. Management recognizes the sensitivity of various assumptions made in the quantitative modeling of expected losses and may adjust reserves depending upon the level of uncertainty that currently exists in one or more assumptions.

As of March 31, 2024, based on unfunded commitments reported in other liabilities. The amountsensitivity analyses across all segments of the allowance for credit losses is affectedperforming loan portfolio, a 5% increase in historical loss rates would have had an impact of $1.9 million increase to funded reserves. On the other hand, a 5% increase in each qualitative risk factor across all segments (where assigned) would have an impact of $3.2 million increase in funded reserves. Increasing estimated loss rates (i.e. quantitative and qualitative) by the following: (1) charge-offs of loans that decrease the allowance, (2) subsequent recoveries on loans previously charged off that increase the allowance and (3) provisions for (or reversal of) credit losses charged to income that increase or decrease the allowance. Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. The total allowance for credit losses includes activity related to allowances calculated in accordance with Accounting Standards Codification (“ASC”) 326 – Measurement of Credit Losses on Financial Instruments.5 basis points would have a $3.8 million impact.
In addition, various regulatory agencies, as an integral part of the examination process, periodically review the allowance for credit losses. Such agencies may require the Bank to recognize adjustments to the allowance based on their judgments of the information available to them at the time of their examination.
The allowance for credit losses could be affected by significant downturns in circumstances relating to loan quality and economic conditions and as such may not be sufficient to cover expected losses in the loan portfolio which could necessitate additional provisions or a reduction in the allowance for credit losses if our assumption prove to be incorrect. Unanticipated changes and events could have a significant impact on the financial performance of borrowers and their ability to perform as agreed. We may experience significant credit losses if borrowers experience financial difficulties, which could have a material adverse effect on our operating results.
The provision for credit losses for the three and nine months ended September 30, 2023 and 2022, primarily resulted from considerations of a less favorable outlook in the current and forecasted macroeconomic variables such as interest rates, GDP and unemployment as a result of the potential slowdown of economic activity impacted by the policies of the Board of Governors of the Federal Reserve System, among other factors.
Fair value of loans acquired in a business combination
In conjunction with the Merger, the Company recorded $273.6 million of goodwill, based on the fair value of acquired assets and liabilities of CBTX. The fair value often involved third-party estimates utilizing input assumptions by management which may be complex or uncertain. The fair value of acquired loans is based on a discounted cash flow methodology that considers factors such as type of loan and related collateral, and requires management’s judgement on estimates about discount rates, expected future cash flows, market conditions and other future events.
For purchased financial loans with credit deterioration, PCD loans, an estimate of expected credit losses was made for loans with similar risk characteristics and was added to the purchase price to establish the initial amortized cost basis of the PCD loans. Any difference between the unpaid principal balance and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. For acquired loans not deemed PCD at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans.
Management relied on economic forecasts, internal valuations, or other relevant factors which were available at the time of the Merger in the determination of the assumptions used to calculate the fair value of the acquired loans. The estimates about discount rates, expected future cash flows, market conditions and other future events are subjective and may differ from estimates. The estimate of fair values on acquired loans contributed to the recorded goodwill from the Merger. In future income statement periods, interest income on loans will include the amortization and accretion of any premiums and discounts resulting from the fair value of acquired loans. Additionally, the provision for credit losses on acquired individually analyzed PCD loans may be impacted due to changes in the assumptions used to calculated expected cash flows.Goodwill

Merger

The acquisition method of accounting requires that assets acquired and liabilities assumed in business combinations are recorded at their fair values. This often involves estimates based on third-party or internal valuations based on discounted cash flow analyses or other valuation techniques, which are inherently subjective. Business combinations also typically result in goodwill, which is subject to ongoing periodic impairment tests based on the fair values of the reporting units to which the goodwill relates. The amortization of intangible assets with definite useful lives is based upon the estimated economic benefits to be received, which is also subjective. Provisional estimates of fair values may be adjusted for a period of up to one year from the acquisition date if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the
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measurement of the amounts recognized as of that date. Adjustments recorded during this period are recognized in the current reporting period.
Management uses various valuation methodologies to estimate the fair value of these assets and liabilities, and often involves a significant degree of judgment, particularly when liquid markets do not exist for the particular item being valued. Examples of such items include loans, deposits, identifiable intangible assets and certain other assets and liabilities. Management uses significant estimates and assumptions to value such items, including projected cash flows, repayment rates, default rates and losses assuming default, discount rates, and realizable collateral values. The allowance for credit losses on PCD loans is recognized within business combination accounting. The allowance for credit losses for non-purchased credit deteriorated (“non-PCD”) assets is recognized as provision expense in the same reporting period as the business combination. The valuation of other identifiable intangible assets, including core deposit intangibles and other intangibles, requires assumptions such as projected attrition rates, expected revenue and costs, discount rates and other forward-looking factors. The purchase date valuations and any subsequent adjustments also determine the amount of goodwill recognized in connection with the business combination. Our estimates of the fair value of assets acquired and liabilities assumed are based upon assumptions that we believe to be reasonable, and whenever necessary, include assistance from independent third-party appraisal and valuation firms.
Goodwill
Goodwill represents the excess of the consideration paid over the fair value of the net assets acquired in a business
combination. During the measurement period, the Company may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date. During the third quarter of 2023, the Company completed the final tax returns related to CBTX's business and operations through September 30, 2022. After completion of these tax returns, the Company increased income tax balances and goodwill in the amount of $58 thousand which finalized all purchase accounting adjustments for the Merger.

Goodwill is subject to impairment testing, which must be conducted at least annually or upon the occurrence of a triggering event. Goodwill is recorded and evaluated for impairment at its reporting unit, the Company. The Company's policy is to test goodwill for impairment at least annually as of October 1st, or on an interim basis if an event triggering an impairment assessment is determined to have occurred. Various factors, such as the Company’s results of operations, the trading price of the Company’s common stock relative to the book value per share, macroeconomic conditions and conditions in the banking sector, inform whether a triggering event for an interim goodwill impairment test has occurred. The impairment test compares the estimated fair value of each reporting unit with its net book value. If the unit’s fair value is less than its carrying value, an estimateimpairment loss is recognized in our results of operations in the implied fair value of the goodwill is comparedperiods in which they become known in an amount equal to the goodwill’s carrying value and any impairment recognized.this excess.

During the nine months ended September 30, 2023, economic uncertainty and market volatility resulting from the rising interest rate environment and the recent banking crisisfailures resulted in a decrease in the Company's stock price and market capitalization. Management believed such decrease wasthe collective events met the requirements of a triggering event requiringand an interim goodwill impairment quantitative analysis for third quarterwas performed as of September 30, 2023. The Company engaged an independent third-party service provider to assist management with the determination of the fair value of the Company as of September 30, 2023. A weighted combination of a risk-weighted income valuation methodology, comprising a discounted cash flow analysis and a market valuation methodology, comprising the guideline public company method and income approach method was employed.

In performing the discount cash flow analysis, the Company utilized multi-year cash projections that rely on internal forecasts of loan and deposit growth, bond mix, financing composition, market pricing of securities, credit performance, forward interest rates, future returns driven by net interest margin, fee generation and expense incurrence, industry and economic trends, and other relevant considerations.

The discount rate was calculated as the cost of equity capital using the modified capital asset pricing model, which includes variables including the risk-free interest rate, beta, equity risk premium, size premium, and company-specific risk premium.

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The market approach considers a combination of price to book value and price to earnings, adjusted based on companies similar to the reporting unit and adjusted for selected multiples, along with a control premium based on a review of transactions in the banking industry in order to calculate the indicated value of the Company's equity on a control, marketable basis. The analysis resulted in the Company's fair value exceeding its carrying value resulting in no impairment charge for the period.
Significant
A significant amount of judgment is necessaryinvolved in the determination of the fair value of a reporting unit. Future events could cause the Company to conclude that the Company’s goodwill has become impaired, which would result in recording an impairment loss. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. Management will continue evaluating the economic conditions at future reporting periods for triggering events.
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See Note 32 – Goodwill and Other Intangible Assets to the consolidated financial statements for additional information on the Company’s goodwill balances and Note 2 – Acquisitions to the consolidated financial statements for goodwill and intangibles recorded in related to the Merger.intangibles.
Recently Issued Accounting Pronouncements
We have evaluated new accounting pronouncements that have recently been issued. Refer to Note 1 of the Company’s consolidated financial statements for a discussion of recent accounting pronouncements that have been adopted by the Company or that will require enhanced disclosures in the Company’s financial statements in future periods.
Results of Operations
Net income was $30.9$26.1 million, or $0.58$0.49 per diluted share, for the thirdfirst quarter 20232024 compared to $14.3$37.1 million, or $0.50$0.70 per diluted share, for the thirdfirst quarter 2022.2023. The increasedecrease in net income was primarily due to a $46.0$13.7 million increasedecrease in net interest income and a $1.7$1.2 million increasedecrease in noninterest income, partially offset by a $26.7$1.2 million increasedecrease in noninterest expense and a $4.0$3.2 million increasedecrease in the provision for income taxes, all primarily resulting from the Merger.taxes. Acquisition and merger-related expenses totaled $3.4 million for the third quarter of 2023 compared $10.6 million for the third quarter of 2022.
Annualized returns on average assets, returns on average equity and efficiency ratios were 1.14%0.98%, 8.34%6.88% and 63.50%66.18%, for the three months ended September 30, 2023,March 31, 2024, compared to 0.84%1.38%, 7.90%10.62% and 69.18%58.96%, for the three months ended September 30, 2022.March 31, 2023. The efficiency ratio is calculated by dividing total noninterest expense by the sum of net interest income plus noninterest income, excluding net gains and losses on the sale of loans, securities and assets. Additionally, taxes and provision for loan losses are not part of the efficiency ratio calculation.
Net income was $103.2 million, or $1.94 per diluted share, for the nine months ended September 30, 2023 compared to $49.4 million, or $1.71 per diluted share, for the nine months ended September 30, 2022. The increase in net income was primarily due to a $157.5 million increase in net interest income and a $8.0 million increase in noninterest income, partially offset by a $96.1 million increase in noninterest expense, a $2.0 million increase in the provision for credit losses and a $13.5 million increase in the provision for income taxes, all primarily resulting from the Merger. Acquisition and merger-related expenses totaled $12.5 million for the nine months ended September 30, 2023 compared to $12.7 million for the nine months ended September 30, 2022.
Annualized returns on average assets, returns on average equity and efficiency ratios were 1.28%, 9.52% and 61.02%, for the nine months ended September 30, 2023, compared to 0.94%, 8.74% and 63.62%, for the nine months ended September 30, 2022.
Net Interest Income
Three months ended September 30, 2023March 31, 2024 compared with three months ended September 30, 2022.March 31, 2023. Net interest income before the provision for credit losses for the three months ended September 30, 2023March 31, 2024 was $106.7$102.1 million compared with $60.7$115.8 million for the three months ended September 30, 2022, an increaseMarch 31, 2023, a decrease of $46.0$13.7 million, or 75.8%11.8%, primarily due to the increase in the cost of funds and average interest-earning assets and interest-bearing liabilities as a result ofmore than offsetting the Merger.increase in interest income.
Interest income was $151.3$148.4 million for the three months ended September 30, 2023,March 31, 2024, an increase of $83.4$8.0 million, or 122.8%5.7%, compared with $67.9$140.4 million for the three months ended September 30, 2022,March 31, 2023, primarily due to the Merger as average interest-earning assets balances increased along with increased rates, higher-yielding loans and purchase accounting adjustments.increased average loans outstanding. Average interest-earning assets increased $3.37 billion,decreased $170.3 million, or 53.3%1.7%, for the three months ended September 30, 2023March 31, 2024 compared with the three months ended September 30, 2022,March 31, 2023, primarily due tothe decrease in average securities and deposits in other financial institutions, partially offset by the increase in loans as a result of the Merger.average loans. Average loans to average interest earning assets increased to 82.9%82.3% for the three months ended September 30, 2023March 31, 2024 compared to 70.4%79.9% for the same period in the prior year. Additionally, interest income from purchase accounting adjustments was $12.4$8.6 million for the three months ended September 30, 2023.
Interest expense was $44.5March 31, 2024, compared to $10.1 million for the three months ended September 30, 2023, an increase of $37.4 million, or 519.4%, compared with $7.2March 31, 2023.
Interest expense was $46.3 million for the three months ended September 30, 2022.March 31, 2024, an increase of $21.7 million, or 88.3%, compared with $24.6 million for the three months ended March 31, 2023. This increase was primarily due to higher funding costs on interest-bearing deposits due to higher interest rates and an increase in average interest-bearing liabilities. The cost of average interest-bearing liabilities increased to 3.22%3.36% for the three months ended September 30, 2023March 31, 2024 compared to 0.81%1.91% for the same period in 2022.2023. Average interest-bearing liabilities increased $1.95 billion$318.9 million for the three months ended September 30, 2023March 31, 2024 compared to the three months ended September 30, 2022,March 31, 2023, primarily due to the Merger.an increase in certificates and other time deposits and interest-bearing demand deposits, partially offset by a decrease in average money market and savings deposits.
Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-earning assets, for the three months ended September 30, 2023March 31, 2024 was 4.37%4.26%, an increasea decrease of 5254 basis points compared to 3.85%4.80% for the three months ended September 30, 2022.March 31, 2023. The increasedecrease in the net interest margin on a tax equivalent basis was primarily due to theincreased
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Merger and an increase in the average yield on interest-earning assets partially offset by increased funding costs. The average rate paid on interest-bearing liabilities of 3.36% and the average yield on interest-earning assets of 6.19% and the average rate paid on interest-bearing liabilities of 3.22% for the thirdfirst quarter of 20232024 increased by 193145 basis points and 24139 basis points, respectively, over the same period in 2022.2023. Tax equivalent adjustments to net interest margin are the result of increasing income from tax-free securities and loans by an amount equal to the taxes that would have been paid if the income were fully taxable based on a 21% federal tax rate for the three months ended September 30,March 31, 2024 and 2023, and 2022, thus making tax-exempt yields comparable to taxable asset yields.
The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from average interest-earning assets and the annualized resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed in both dollars and rates. Any nonaccruingAverage loans have been included in the table asinclude loans on nonaccrual status carrying a zero yield.
Three Months Ended September 30,
20232022
Average
Balance
Interest
Earned/
Interest
Paid
Average
Yield/ Rate
Average
Balance
Interest
Earned/
Interest
Paid
Average
Yield/ Rate
(Dollars in thousands)
Three Months Ended March 31,Three Months Ended March 31,
202420242023
Average
Balance
Average
Balance
Interest
Earned/
Interest
Paid
Average
Yield/ Rate
Average
Balance
Interest
Earned/
Interest
Paid
Average
Yield/ Rate
(Dollars in thousands)(Dollars in thousands)
AssetsAssets      Assets  
Interest-earning Assets:Interest-earning Assets:      Interest-earning Assets:  
LoansLoans$8,043,706 $138,948 6.85 %$4,456,174 $58,025 5.17 %Loans$7,938,824 $$134,685 6.82 6.82 %$7,847,011 $$125,729 6.50 6.50 %
SecuritiesSecurities1,471,916 9,930 2.68 %1,709,470 9,249 2.15 %Securities1,441,814 10,111 10,111 2.82 2.82 %1,604,011 10,915 10,915 2.76 2.76 %
Deposits in other financial institutionsDeposits in other financial institutions181,931 2,391 5.21 %160,340 608 1.50 %Deposits in other financial institutions264,906 3,627 3,627 5.51 5.51 %364,781 3,771 3,771 4.19 4.19 %
Total interest-earning assetsTotal interest-earning assets9,697,553 $151,269 6.19 %6,325,984 $67,882 4.26 %Total interest-earning assets9,645,544 $$148,423 6.19 6.19 %9,815,803 $$140,415 5.80 5.80 %
Allowance for credit losses on loansAllowance for credit losses on loans(99,892)(50,609)
Noninterest-earning assetsNoninterest-earning assets1,143,634 442,511 
Noninterest-earning assets
Noninterest-earning assets
Total assets
Total assets
Total assetsTotal assets$10,741,295 $6,717,886 
Liabilities and Shareholders' Equity
Liabilities and Shareholders Equity
Liabilities and Shareholders Equity
Liabilities and Shareholders Equity
Interest-bearing Liabilities:Interest-bearing Liabilities:
Interest-bearing Liabilities:
Interest-bearing Liabilities:
Interest-bearing demand deposits
Interest-bearing demand deposits
Interest-bearing demand depositsInterest-bearing demand deposits$1,400,508 $10,415 2.95 %$978,531 $2,380 0.96 %$1,697,211 $$12,278 2.91 2.91 %$1,650,273 $$8,382 2.06 2.06 %
Money market and savings depositsMoney market and savings deposits2,166,610 13,142 2.41 %1,500,083 1,147 0.30 %Money market and savings deposits2,150,805 15,252 15,252 2.85 2.85 %2,490,889 9,655 9,655 1.57 1.57 %
Certificates and other time depositsCertificates and other time deposits1,400,367 13,282 3.76 %877,231 1,664 0.75 %Certificates and other time deposits1,444,048 15,084 15,084 4.20 4.20 %861,595 3,307 3,307 1.56 1.56 %
Borrowed fundsBorrowed funds411,212 5,801 5.60 %68,752 499 2.88 %Borrowed funds134,400 1,774 1,774 5.31 5.31 %105,191 1,317 1,317 5.08 5.08 %
Subordinated debtSubordinated debt109,608 1,908 6.91 %109,177 1,502 5.46 %Subordinated debt109,808 1,917 1,917 7.02 7.02 %109,415 1,927 1,927 7.14 7.14 %
Total interest-bearing liabilitiesTotal interest-bearing liabilities5,488,305 $44,548 3.22 %3,533,774 $7,192 0.81 %Total interest-bearing liabilities5,536,272 $$46,305 3.36 3.36 %5,217,363 $$24,588 1.91 1.91 %
Noninterest-Bearing Liabilities:
Noninterest-bearing Liabilities:
Noninterest-bearing Liabilities:
Noninterest-bearing Liabilities:
Noninterest-bearing demand deposits
Noninterest-bearing demand deposits
Noninterest-bearing demand depositsNoninterest-bearing demand deposits3,695,592 2,424,884 
Other liabilitiesOther liabilities86,389 41,792 
Other liabilities
Other liabilities
Total liabilities
Total liabilities
Total liabilitiesTotal liabilities9,270,286 6,000,450 
Shareholders' equityShareholders' equity1,471,009 717,436 
Total liabilities and shareholders' equity$10,741,295 $6,717,886 
Shareholders' equity
Shareholders' equity
Total liabilities and shareholders equity
Total liabilities and shareholders equity
Total liabilities and shareholders equity
Net interest rate spread
Net interest rate spread
Net interest rate spreadNet interest rate spread2.97 %3.45 %2.83 %3.89 %
Net interest income and margin(1)
Net interest income and margin(1)
$106,721 4.37 %$60,690 3.81 %
Net interest income and margin(1)
Net interest income and margin(1)
$102,118 4.26 %$115,827 4.79 %
Net interest income and margin (tax equivalent)(2)
Net interest income and margin (tax equivalent)(2)
Net interest income and margin (tax equivalent)(2)
Net interest income and margin (tax equivalent)(2)
$106,919 4.37 %$61,418 3.85 %$102,207 4.26 4.26 %$116,119 4.80 4.80 %
Cost of fundsCost of funds1.92 %0.48 %
Cost of funds
Cost of funds2.06 %1.06 %
Cost of depositsCost of deposits1.69 %0.36 %Cost of deposits1.94 %0.94 %
(1)The net interest margin is equal to annualized net interest income divided by average interest-earning assets.
(2)Tax-equivalent adjustments have been computed using a federal income tax rate of 21% for the three months ended September 30, 2023March 31, 2024 and 2022.2023.
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Nine months ended September 30, 2023 compared with nine months ended September 30, 2022. Net interest income before the provision for credit losses for the nine months ended September 30, 2023 was $330.8 million, compared with $173.3 million for the nine months ended September 30, 2022, an increase of $157.5 million, or 90.9%, primarily due to the increase in average interest-earning assets and interest-bearing liabilities as a result of the Merger.
Interest income was $438.6 million for the nine months ended September 30, 2023, an increase of $247.6 million, or 129.6%, compared with $191.0 million for the nine months ended September 30, 2022, primarily due to the Merger as average interest-earning assets balances increased along with increased rates and an increase in higher-yielding loans. Average interest-earning assets increased $3.13 billion, or 47.4%, for the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022, primarily due to the Merger. Average loans to average interest earning assets increased to 81.7% for the nine months ended September 30, 2023 compared to 65.6% for the same period in the prior year. Additionally, interest income from purchase accounting adjustments was $35.1 million for the nine months ended September 30, 2023.
Interest expense was $107.8 million for the nine months ended September 30, 2023, an increase of $90.1 million, or 509.8%, compared with $17.7 million for the nine months ended September 30, 2022. This increase was primarily due to higher funding costs on interest-bearing deposits due to higher interest rates and an increase in average interest-bearing liabilities. The cost of average interest-bearing liabilities increased to 268 basis points for the nine months ended September 30, 2023 compared to 62 basis points for the same period in 2022. Average interest-bearing liabilities increased $1.55 billion, or 40.5%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to the Merger.
Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-earning assets, for the nine months ended September 30, 2023 was 4.55%, an increase of 100 basis points compared to 3.55% for the nine months ended September 30, 2022. The increase in the net interest margin on a tax equivalent basis was primarily due to the Merger and an increase in the average yield on interest-earning assets partially offset by increased funding costs. The average yield on interest-earning assets of 6.02% and the average rate paid on interest-bearing liabilities of 2.68% for the nine months ended September 30, 2023 increased by 215 basis points and 206 basis points, respectively, over the same period in 2022. Tax equivalent adjustments to net interest margin are the result of increasing income from tax-free securities and loans by an amount equal to the taxes that would have been paid if the income were fully taxable based on a 21% federal tax rate for the nine months ended September 30, 2023 and 2022, thus making tax-exempt yields comparable to taxable asset yields.
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The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from average interest-earning assets and the annualized resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed in both dollars and rates. Any nonaccruing loans have been included in the table as loans carrying a zero yield.
Nine Months Ended September 30,
20232022
Average
Balance
Interest
Earned/
Interest
Paid
Average
Yield/ Rate
Average
Balance
Interest
Earned/
Interest
Paid
Average
Yield/ Rate
(Dollars in thousands)
Assets
Loans$7,957,911 $398,608 6.70 %$4,331,288 $164,230 5.07 %
Securities1,525,808 31,007 2.72 %1,774,149 24,970 1.88 %
Deposits in other financial institutions251,475 9,027 4.80 %498,456 1,825 0.49 %
Total interest-earning assets9,735,194 $438,642 6.02 %6,603,893 $191,025 3.87 %
Allowance for credit losses on loans(96,570)(49,422)
Noninterest-earning assets1,148,847 441,767 
Total assets$10,787,471 $6,996,238 
Liabilities and Shareholders' Equity
Interest-bearing Liabilities:
Interest-bearing demand deposits$1,478,547 $28,141 2.54 %$1,031,006 $3,856 0.50 %
Money market and savings deposits2,291,588 34,161 1.99 %1,549,969 2,877 0.25 %
Certificates and other time deposits1,164,572 26,211 3.01 %1,069,011 5,742 0.72 %
Borrowed funds333,220 13,653 5.48 %69,492 799 1.54 %
Subordinated debt109,508 5,647 6.89 %109,046 4,407 5.40 %
Total interest-bearing liabilities5,377,435 $107,813 2.68 %3,828,524 $17,681 0.62 %
Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits3,878,760 2,373,489 
Other liabilities81,894 39,123 
Total liabilities9,338,089 6,241,136 
Shareholders' equity1,449,382 755,102 
Total liabilities and shareholders' equity$10,787,471 $6,996,238 
Net interest rate spread3.34 %3.25 %
Net interest income and margin(1)
$330,829 4.54 %$173,344 3.51 %
Net interest income and margin (tax equivalent)(2)
$331,549 4.55 %$175,578 3.55 %
Cost of funds1.56 %0.38 %
Cost of deposits1.34 %0.28 %
(1)The net interest margin is equal to annualized net interest income divided by average interest-earning assets.
(2)Tax-equivalent adjustments have been computed using a federal income tax rate of 21% for the nine months ended September 30, 2023 and 2022.
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The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earnings assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.
 Three Months Ended September 30,Nine Months Ended September 30,
2023 vs. 20222023 vs. 2022
Increase (Decrease)
Due to Change in
Increase (Decrease)
Due to Change in
VolumeRateTotalVolumeRateTotal
(In thousands)
Three Months Ended March 31,
Three Months Ended March 31,
Three Months Ended March 31,
2024 vs. 2023
2024 vs. 2023
2024 vs. 2023
Increase (Decrease)
Due to Change in
Increase (Decrease)
Due to Change in
Increase (Decrease)
Due to Change in
Volume
Volume
Volume
(In thousands)
(In thousands)
(In thousands)
Interest-earning Assets:Interest-earning Assets:
LoansLoans$46,750 $34,173 $80,923 $137,664 $96,714 $234,378 
Loans
Loans
Securities
Securities
SecuritiesSecurities(1,287)1,968 681 (3,492)9,529 6,037 
Deposits in other financial institutionsDeposits in other financial institutions82 1,701 1,783 (905)8,107 7,202 
Total increase in interest income45,545 37,842 83,387 133,267 114,350 247,617 
Deposits in other financial institutions
Deposits in other financial institutions
Total (decrease) increase in interest income
Total (decrease) increase in interest income
Total (decrease) increase in interest income
Interest-bearing Liabilities:
Interest-bearing Liabilities:
Interest-bearing Liabilities:Interest-bearing Liabilities:
Interest-bearing demand depositsInterest-bearing demand deposits1,021 7,014 8,035 1,674 22,611 24,285 
Interest-bearing demand deposits
Interest-bearing demand deposits
Money market and savings deposits
Money market and savings deposits
Money market and savings depositsMoney market and savings deposits504 11,491 11,995 1,387 29,897 31,284 
Certificates and other time depositsCertificates and other time deposits989 10,629 11,618 515 19,954 20,469 
Certificates and other time deposits
Certificates and other time deposits
Borrowed funds
Borrowed funds
Borrowed fundsBorrowed funds2,486 2,816 5,302 3,038 9,816 12,854 
Subordinated debtSubordinated debt400 406 19 1,221 1,240 
Subordinated debt
Subordinated debt
Total increase in interest expenseTotal increase in interest expense5,006 32,350 37,356 6,633 83,499 90,132 
Increase in net interest income$40,539 $5,492 $46,031 $126,634 $30,851 $157,485 
Total increase in interest expense
Total increase in interest expense
Decrease in net interest income
Decrease in net interest income
Decrease in net interest income
Provision for Credit Losses
Our allowance for credit losses is established through charges to income in the form of the provision in order to bring our allowance for credit losses for various types of financial instruments including loans, unfunded commitments and securities to a level deemed appropriate by management. We recorded a provision for credit losses of $2.3$4.1 million and $2.0$3.7 million for the three months ended September 30,March 31, 2024 and 2023, and 2022, respectively, and a $7.9 million and $5.9 million provision for credit losses for the nine months ended September 30, 2023 and 2022, respectively. The provision for credit losses for the three and nine months ended September 30, 2023 and 2022,March 31, 2024 primarily resulted from considerations of a less favorable outlook inchanges to the current and forecasted macroeconomic variables such as interest rates, GDP and unemployment as a result ofspecific reserves within the potential slowdown of economic activity by the FED's tightening policy to control inflation,allowance for credit losses model, among other things.
We recorded net charge-offs of $8.1 million$714 thousand for the three months ended September 30, 2023March 31, 2024 compared to net recoveriescharge-offs of $245$192 thousand during the three months ended September 30, 2022. Net charge-offs of $8.5 million were recorded for the nine months ended September 30, 2023 compared to net charge-offs of $643 thousand for the nine months ended September 30, 2022. The increase in charge-offs during 2023 was primarily due to a single commercial and industrial loan relationship that was placed on nonaccrual status at DecemberMarch 31, 2022 and had an allowance for credit losses of $5.1 million at June 30, 2023. During the third quarter 2023, the borrower’s financial condition further deteriorated, which prompted the charge-off of $8.0 million on the loan relationship.
Noninterest Income
Our primary sources of noninterest income are service charges on deposit accounts, debit card and ATM income service charges on deposit accounts,and income earned on bank-owned life insurance and nonsufficient funds ("NSF") and overdraft charges.insurance. Noninterest income does not include loan origination fees which are recognized over the life of the related loan as an adjustment to yield using the interest method.
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Three months ended September 30, 2023March 31, 2024 compared with three months ended September 30, 2022March 31, 2023. Noninterest income totaled $4.7$6.3 million for the three months ended September 30, 2023March 31, 2024 compared with $3.0$7.5 million for the same period in 2022, an increase2023, a decrease of $1.7$1.2 million, or 56.8%16.0%, primarily due to increaseddecreased debt card and ATM income and service charges due to increased scale as a result of the Merger partially offset by the impact of the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("(“Durbin Amendment"Amendment”) along with a decision made by the Company to no longer charge NSF fees.
Nine months ended September 30, 2023 compared with nine months ended September 30, 2022. Noninterest income totaled $17.7 million for the nine months ended September 30, 2023 compared with $9.7 million for the same period in 2022, an increase of $8.0 million, or 81.9%, primarily due to increased debt card and ATM income and service charges due to increased scale as a result of the Merger partially offset by the impact of the Durbin Amendment along with a decision made by the Company to no longer charge NSF fees.
The following table presents, for the periods indicated, the major categories of noninterest income:
 Three Months Ended September 30,Increase
(Decrease)
Nine Months Ended September 30,Increase
(Decrease)
 2023202220232022
 (In thousands)
Nonsufficient funds and overdraft charges$291 $145 $146 $1,115 $387 $728 
Service charges on deposit accounts1,329 527 802 3,429 1,614 1,815 
Gain (loss) on sale of assets— 42 (42)192 25 167 
Bank-owned life insurance income551 135 416 1,605 610 995 
Debit card and ATM income935 869 66 4,454 2,568 1,886 
Other(1)
1,589 1,277 312 6,881 4,513 2,368 
Total noninterest income$4,695 $2,995 $1,700 $17,676 $9,717 $7,959 
(1)Other includes wire transfer and letter of credit fees, among other items.
Noninterest Expense
Three months ended September 30, 2023 compared with three months ended September 30, 2022. Noninterest expense was $70.7 million for the three months ended September 30, 2023 compared to $44.0 million for the three months ended September 30, 2022, an increase of $26.7 million, or 60.7%, primarily due to increased salaries and employee benefits, amortization of intangibles, data processing and software amortization, net occupancy and equipment and acquisition and merger-related costs.
Nine months ended September 30, 2023 compared with nine months ended September 30, 2022. Noninterest expense was $212.6 million for the nine months ended September 30, 2023 compared to $116.5 million for the nine months ended September 30, 2022, an increase of $96.1 million, or 82.5%, primarily due to increased salaries and employee benefits, amortization of intangibles, data processing and software amortization and net occupancy and equipment.
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The following table presents, for the periods indicated, the major categories of noninterest income:
 Three Months Ended March 31,Increase
(Decrease)
 20242023
 (In thousands)
Service charges on deposit accounts1,598 1,349 249 
Gain on sale of assets513 198 315 
Bank-owned life insurance income587 522 65 
Debit card and ATM income527 1,698 (1,171)
Other(1)
3,071 3,731 (660)
Total noninterest income$6,296 $7,498 $(1,202)
(1)Other includes wire transfer and letter of credit fees, among other items.
Noninterest Expense
Three months ended March 31, 2024 compared with three months ended March 31, 2023. Noninterest expense was $71.4 million for the three months ended March 31, 2024 compared to $72.6 million for the three months ended March 31, 2023, a decrease of $1.2 million, or 1.6%, primarily due to a decrease in acquisition and merger-related expenses, partially offset by increased salaries and employee benefits, professional fees and other noninterest expenses.
The following table presents, for the periods indicated, the major categories of noninterest expense:
Three Months Ended September 30,Increase
(Decrease)
Nine Months Ended September 30,Increase
(Decrease)
2023202220232022
(In thousands)(In thousands)
Salaries and employee benefits(1)
Salaries and employee benefits(1)
$39,495 $22,013 $17,482 $116,570 $66,605 $49,965 
Net occupancy and equipmentNet occupancy and equipment4,455 2,129 2,326 12,360 6,554 5,806 
Net occupancy and equipment
Net occupancy and equipment
Depreciation
Depreciation
DepreciationDepreciation1,952 1,003 949 5,629 3,048 2,581 
Data processing and software amortizationData processing and software amortization4,798 2,541 2,257 14,526 7,561 6,965 
Data processing and software amortization
Data processing and software amortization
Professional fees
Professional fees
Professional feesProfessional fees997 485 512 4,088 1,285 2,803 
Regulatory assessments and FDIC insuranceRegulatory assessments and FDIC insurance1,814 1,134 680 5,863 3,651 2,212 
Regulatory assessments and FDIC insurance
Regulatory assessments and FDIC insurance
Amortization of intangibles
Amortization of intangibles
Amortization of intangiblesAmortization of intangibles6,876 750 6,126 20,636 2,252 18,384 
CommunicationsCommunications663 359 304 2,053 1,063 990 
Communications
Communications
Advertising
Advertising
AdvertisingAdvertising877 385 492 2,623 1,330 1,293 
Acquisition and merger-related expensesAcquisition and merger-related expenses3,421 10,551 (7,130)12,483 12,669 (186)
Acquisition and merger-related expenses
Acquisition and merger-related expenses
Other
Other
OtherOther5,400 2,681 2,719 15,722 10,434 5,288 
Total noninterest expenseTotal noninterest expense$70,748 $44,031 $26,717 $212,553 $116,452 $96,101 
Total noninterest expense
Total noninterest expense
(1)Total salaries and employee benefits includes $2.8 million and $969 thousand$2.6 million for the three months ended September 30,March 31, 2024 and 2023, and 2022 and $8.2 million and $2.9 million for the nine months ended September 30, 2023 and 2022, respectively, of stock based compensation expense.
Salaries and employee benefits. Salaries and benefits increased $17.5$1.6 million, or 79.4%4.0%, for the three months ended September 30, 2023 and $50.0 million, or 75.0% for the nine months ended September 30, 2023,March 31, 2024 compared to the same periods in 2022three months ended March 31, 2023 primarily due to the Merger.annual salary increases.
Acquisition and merger-related expenses. Acquisition and merger-related expenses of $3.4 million and $12.5$6.2 million incurred during the three and nine months ended September 30,March 31, 2023, respectively, were primarily related to compensation, and legal and advisory fees associated with the Merger.2022 Merger between Allegiance and CBTX. No acquisition and merger-related expenses were incurred in the first quarter of 2024.
Amortization of intangibles.Professional fees. Amortization of intangiblesProfessional fees increased $6.1to $2.7 million for the three months ended September 30, 2023 and $18.4March 31, 2024 compared to $1.5 million for the ninethree months ended September 30,March 31, 2023 comparedprimarily due to increased consulting fees due to various projects, some of which related to the same periods in 2022 dueCompany’s assets crossing the $138.2 million core deposit intangible created as a result$10 billion threshold.
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Efficiency Ratio
The efficiency ratio is a supplemental financial measure utilized in management’s internal evaluation of our performance. We calculate our efficiency ratio by dividing total noninterest expense by the sum of net interest income and noninterest income, excluding net gains and losses on the sale of loans, securities and assets. Additionally, taxes and provision for credit losses are not part of this calculation. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease would indicate a more efficient allocation of resources. Our efficiency ratio was 63.50%66.18% for the three months ended September 30, 2023March 31, 2024 compared to 69.18%58.96% for the three months ended September 30, 2022 and 61.02% for the nine months ended September 30,March 31, 2023, compared to 63.62% for the nine months ended September 30, 2022, respectively.
We monitor the efficiency ratio in comparison with changes in our total assets and loans, and we believe that maintaining or reducing the efficiency ratio during periods of growth demonstrates the scalability of our operating platform. We expect to continue to benefit from our scalable platform in future periods as we continue to monitor overhead expenses necessary to support our growth.
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Income Taxes
The amount of federal and state income tax expense is influenced by the amount of pre-tax income, tax-exempt income and other nondeductible expenses. Income tax expense increased $4.0decreased $3.2 million for the three months ended September 30, 2023 and $13.5 million for the nine months ended September 30, 2023March 31, 2024 compared with the same periodsperiod in 20222023 primarily due to the increasedecrease in pre-tax net income. Our effective tax rate was 19.4%20.5% and 19.3%21.1% for the three months ended September 30,March 31, 2024 and 2023, and 2022 and 19.4% and 18.6% for the nine months ended September 30, 2023 and 2022, respectively.
Financial Condition
Loan Portfolio
At September 30, 2023,March 31, 2024, total loans were $8.00$7.91 billion, an increasea decrease of $249.8$17.0 million, or 3.2%0.2%, compared with December 31, 2022, primarily due to organic growth within our loan portfolio during the nine months ended September 30, 2023. Total loans as a percentage of deposits were 92.1%89.9% and 83.7%89.3% as of September 30, 2023March 31, 2024 and December 31, 2022,2023, respectively. Total loans as a percentage of assets were 75.1%73.7% and 71.1%74.4% as of September 30, 2023March 31, 2024 and December 31, 2022,2023, respectively.
The following table summarizes our loan portfolio by type of loan as of the dates indicated:
September 30, 2023December 31, 2022
AmountPercentAmountPercent
(Dollars in thousands)(Dollars in thousands)
Commercial and industrialCommercial and industrial$1,474,600 18.4 %$1,455,795 18.8 %
Paycheck Protection Program (PPP)Paycheck Protection Program (PPP)5,968 0.1 %13,226 0.2 %
Paycheck Protection Program (PPP)
Paycheck Protection Program (PPP)
Real estate:
Real estate:
Real estate:Real estate:
Commercial real estate (including multi-family residential)Commercial real estate (including multi-family residential)4,076,606 50.9 %3,931,480 50.7 %
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)
Commercial real estate construction and land development
Commercial real estate construction and land development
Commercial real estate construction and land developmentCommercial real estate construction and land development1,078,265 13.5 %1,037,678 13.4 %
1-4 family residential (including home equity)1-4 family residential (including home equity)1,024,945 12.8 %1,000,956 12.9 %
1-4 family residential (including home equity)
1-4 family residential (including home equity)
Residential construction
Residential construction
Residential constructionResidential construction289,553 3.6 %268,150 3.4 %
Consumer and otherConsumer and other54,591 0.7 %47,466 0.6 %
Consumer and other
Consumer and other
Total loans
Total loans
Total loansTotal loans8,004,528 100.0 %7,754,751 100.0 %
Allowance for credit losses on loansAllowance for credit losses on loans(93,575)(93,180)
Allowance for credit losses on loans
Allowance for credit losses on loans
Loans, netLoans, net$7,910,953 $7,661,571 
Loans, net
Loans, net
Our lending activities originate from the efforts of our bankers with an emphasis on lending to individuals, professionals, small- to medium-sized businesses and commercial companies generally located in our markets.market. Our strategy for credit risk management generally includes well-defined, centralized credit policies, uniform underwriting criteria and ongoing risk monitoring and review processes for credit exposures. The strategy generally emphasizes regular credit examinations and management reviews of loans. We have certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. We maintain an independent loan review department that reviews and validateswhich includes third-party loan review services to review the credit risk program on a periodic basis. In addition, an independentThe internal loan review department focuses on credits not reviewed by the third-party loan review is performed on a periodic basis during the year.reviewer to ensure more complete coverage of credit risk. Results of these reviews are presented to management and the risk committee of the Board of Directors. The loan review process complements and reinforces the risk identification and assessment decisions made by bankers and credit personnel and contained in our policies and procedures.
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The principal categories of our loan portfolio are discussed below:
Commercial and Industrial. We make commercial and industrial loans in our market area that are underwritten on the basis of the borrower’s ability to service the debt from income. In general, commercial loans involve more credit risk than residential mortgage loans and commercial mortgage loans and therefore typically yield a higher return. The increased risk in commercial loans derives from the expectation that commercial and industrial loans generally are serviced principally from the operations of the business, which may not be successful and from the type of collateral securing these loans. As a result, commercial and industrial loans require more extensive underwriting and servicing than other types of loans. Our commercial and industrial loan portfolio increased by $18.8$42.5 million, or 1.3%3.0%, to $1.47$1.45 billion as of September 30, 2023March 31, 2024 from $1.46$1.41 billion as of December 31, 2022.2023.
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Paycheck Protection Program (PPP)(PPP). The balance of PPP loans decreased $7.3 million$807 thousand to $6.0$4.3 million as of September 30, 2023March 31, 2024 from $13.2$5.1 million as of December 31, 20222023 due to loan forgiveness.
Commercial Real Estate (Including Multi-Family Residential). We make loans collateralized by owner-occupied, nonowner-occupied and multi-family real estate to finance the purchase or ownership of real estate. As of September 30, 2023both March 31, 2024 and December 31, 2022, 46.4% and 45.3%,2023, respectively,46.6% of our commercial real estate loans were owner-occupied. Our commercial real estate loan portfolio increased $145.1decreased $21.9 million, or 3.7%0.5%, to $4.08$4.05 billion as of September 30, 2023March 31, 2024 from $3.93$4.07 billion as of December 31, 2022, primarily as a result of organic loan growth.2023. Included in our commercial real estate portfolio are multi-family residential loans. Our multi-family loans as of September 30, 2023March 31, 2024 decreased to $453.3$452.2 million from $471.6$488.8 million as of December 31, 2022.2023. We had 233236 multi-family loans with an average loan size of $2.1$2.0 million as of September 30, 2023.March 31, 2024.
As of September 30, 2023,March 31, 2024, the Company’s commercial real estate (including multi-family residential) loan portfolio included $313.7$259.8 million of multifamily community development loans with associated tax credits, which fund Texas-based projects to promote affordable housing, compared to $287.3$298.9 million as of December 31, 2022.2023.
Commercial Real Estate Construction and Land Development. We make commercial real estate construction and land development loans to fund commercial construction, land acquisition and real estate development construction. Construction loans involve additional risks as they often involve the disbursement of funds with the repayment dependent on the ultimate success of the project’s completion. Sources of repayment for these loans may be pre-committed permanent financing or sale of the developed property. The loans in this portfolio are monitored closely by management. Due to uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often includes the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. As of September 30, 2023March 31, 2024 and December 31, 2022, 29.6%2023, 19.2% and 18.2%21.1%, respectively, of our commercial real estate construction and land development loans were owner-occupied. Commercial real estate construction and land development loans increased $40.6decreased $21.0 million, or 3.9%2.0%, to $1.08 billion as of September 30, 2023 compared to $1.04 billion as of March 31, 2024 compared to $1.06 billion as of December 31, 2022.2023.
As of September 30, 2023,March 31, 2024, the Company’s commercial real estate construction and land development portfolio included $157.3$120.3 million of construction and development loans to support multifamily community development loans with associated tax credits, which fund Texas-based projects to promote affordable housing, compared to $79.7$80.5 million as of December 31, 2022.2023.
1-4 Family Residential (Including Home Equity). Our residential real estate loans include the origination of 1-4 family residential mortgage loans (including home equity and home improvement loans and home equity lines of credit) collateralized by owner-occupied residential properties located in our market areas. Our residential real estate portfolio (including home equity) increased $24.0$2.1 million, or 2.4%0.2%, to $1.02$1.05 billion as of September 30, 2023 from $1.00 billion as ofMarch 31, 2024 compared to December 31, 2022.2023.
Residential Construction. We make residential construction loans to home builders and individuals to fund the construction of single-family residences with the understanding that such loans will be repaid from the proceeds of the sale of the homes by builders or with the proceeds of a mortgage loan. These loans are secured by the real property being built and are made based on our assessment of the value of the property on an as-completed basis. Our residential construction loans portfolio increased $21.4decreased $14.8 million, or 8.0%5.5%, to $289.6$252.6 million as of September 30, 2023March 31, 2024 from $268.2$267.4 million as of December 31, 2022.2023.
Consumer and Other. Our consumer and other loan portfolio is made up of loans made to individuals for personal purposes and deferred fees and costs on all loan types. Generally, consumer loans entail greater risk than residential real estate loans because they may be unsecured or if secured the value of the collateral, such as an automobile or boat, may be more difficult to assess and more likely to decrease in value than real estate. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are
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dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans. Our consumer and other loan portfolio increased $7.1decreased $3.1 million, or 15.0%4.9%, to $54.6$61.1 million as of September 30, 2023March 31, 2024 from $47.5$64.3 million as of December 31, 2022.2023.
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Asset Quality
We have procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our officers and monitor our delinquency levels for any negative or adverse trends.
Nonperforming Assets
Nonperforming assets totaled $38.3$57.1 million, or 0.48%0.53% of total assets, at September 30, 2023March 31, 2024 compared to $45.0$39.2 million, or 0.41%0.37% of total assets, at December 31, 2022.2023. Nonaccrual loans consisted of 131 separate credits at March 31, 2024 compared to 114 separate credits at December 31, 2023. The following table presents information regarding nonperforming assets as of the dates indicated.
September 30, 2023December 31, 2022 March 31, 2024December 31, 2023
(Dollars in thousands) (Dollars in thousands)
Nonaccrual loans:Nonaccrual loans:
Commercial and industrialCommercial and industrial$14,971 $25,297 
Commercial and industrial
Commercial and industrial
Paycheck Protection Program (PPP)Paycheck Protection Program (PPP)20 105 
Real estate:Real estate:
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)Commercial real estate (including multi-family residential)13,563 9,970 
Commercial real estate construction and land developmentCommercial real estate construction and land development170 — 
1-4 family residential (including home equity)1-4 family residential (including home equity)8,442 9,404 
Residential constructionResidential construction635 — 
Consumer and otherConsumer and other490 272 
Total nonaccrual loansTotal nonaccrual loans38,291 45,048 
Accruing loans 90 or more days past dueAccruing loans 90 or more days past due— — 
Total nonperforming loansTotal nonperforming loans38,291 45,048 
Other real estateOther real estate— — 
Total nonperforming assetsTotal nonperforming assets$38,291 $45,048 
Modified/restructured loans(1)
$13,321 $35,425 
Troubled loan modifications(1)
Nonperforming assets to total assetsNonperforming assets to total assets0.36 %0.41 %Nonperforming assets to total assets0.53 %0.37 %
Nonperforming loans to total loansNonperforming loans to total loans0.48 %0.58 %Nonperforming loans to total loans0.72 %0.49 %
(1)On January 1, 2023,Troubled loan modifications in the Company adopted ASU 2022-02, which replaced the troubled debt restructuring classification with atable above are loans that were modified loan classification that is assessed in a different manner. Modified/restructured loans represent the balance at the end of the respective period for those loans that are not already presented as aincluded in nonperforming loan.
Nonaccrual loans consisted of 111 separate credits at September 30, 2023 compared to 96 separate credits at December 31, 2022.loans.
Allowance for Credit Losses
The allowance for credit losses is a valuation allowance that is established through charges to earnings in the form of a provision for (or reversal of) credit losses calculated in accordance with ASCaccounting standards codification topic (“ASC”) 326,Financial Instruments - Credit Losses that is deducted from the amortized cost basis of certain assets to present the net amount expected to be collected. The amount of each allowance account represents managements best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. For additional information regarding critical accounting estimates and policies, refer to “Critical Accounting Estimates” in this section, Note 1 – Nature of Operations and Significant Accounting and Reporting Policies and Note 54 – Loans and Allowance for Credit Losses in the accompanying notes to the consolidated financial statements.
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Allowance for Credit Losses on Loans
The allowance for credit losses on loans represents management’s estimates of current expected credit losses in the Company’s loan portfolio. Pools of loans with similar risk characteristics are collectively evaluated, while loans that no longer share risk characteristics with loan pools are evaluated individually.
At September 30, 2023March 31, 2024, our allowance for credit losses on loans was $93.6$96.3 million, or 1.17%1.22% of total loans, compared with $93.2$91.7 million, or 1.20%1.16% of total loans, as of December 31, 2022.2023. The increase in the allowance for credit losses on loans during the first ninethree months of 20232024 primarily resulted from changes to the qualitative factorsspecific reserves within the allowance for credit losses model, among other things. The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:
September 30, March 31,
20232022 20242023
(Dollars in thousands) (Dollars in thousands)
Average loans outstandingAverage loans outstanding$7,957,911$4,331,288Average loans outstanding$7,938,824$7,847,011
Gross loans outstanding at end of periodGross loans outstanding at end of period8,004,5284,591,912Gross loans outstanding at end of period7,908,1117,886,044
Allowance for credit losses on loans at beginning of periodAllowance for credit losses on loans at beginning of period93,18047,940Allowance for credit losses on loans at beginning of period91,68493,180
Provision for credit losses on loansProvision for credit losses on loans8,9394,850Provision for credit losses on loans5,3153,200
Charge-offs:Charge-offs:
Commercial and industrial loansCommercial and industrial loans(9,653)(958)
Commercial and industrial loans
Commercial and industrial loans(309)(426)
Real estate:Real estate:
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)Commercial real estate (including multi-family residential)(383)(527)
Commercial real estate construction and land developmentCommercial real estate construction and land development(63)Commercial real estate construction and land development
1-4 family residential (including home equity)1-4 family residential (including home equity)(23)1-4 family residential (including home equity)
Residential constructionResidential construction
Consumer and otherConsumer and other(45)(65)Consumer and other(5)(8)
Total charge-offs for all loan typesTotal charge-offs for all loan types(9,721)(1,469)Total charge-offs for all loan types(841)(434)
Recoveries:Recoveries:
Commercial and industrial loansCommercial and industrial loans1,124720
Commercial and industrial loans
Commercial and industrial loans114208
Real estate:Real estate:
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)
Commercial real estate (including multi-family residential)Commercial real estate (including multi-family residential)165014
Commercial real estate construction and land developmentCommercial real estate construction and land development55Commercial real estate construction and land development
1-4 family residential (including home equity)1-4 family residential (including home equity)91-4 family residential (including home equity)57
Residential constructionResidential construction
Consumer and otherConsumer and other281Consumer and other813
Total recoveries for all loan typesTotal recoveries for all loan types1,177826Total recoveries for all loan types127242
Net charge-offsNet charge-offs(8,544)(643)Net charge-offs(714)(192)
Allowance for credit losses on loans at end of periodAllowance for credit losses on loans at end of period$93,575$52,147Allowance for credit losses on loans at end of period$96,285$96,188
Allowance for credit losses on loans to total loansAllowance for credit losses on loans to total loans1.17 %1.14 %Allowance for credit losses on loans to total loans1.22 %1.22 %
Net charge-offs to average loans(1)
Net charge-offs to average loans(1)
0.14 %0.02 %
Net charge-offs to average loans(1)
0.04 %0.01 %
Allowance for credit losses on loans to nonperforming loansAllowance for credit losses on loans to nonperforming loans244.38 %241.97 %Allowance for credit losses on loans to nonperforming loans168.54 %221.56 %
(1)Interim periods annualized.Annualized.
Allowance for Credit Losses on Unfunded Commitments
The allowance for credit losses on unfunded commitments estimates current expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by us. The allowance for credit losses on unfunded commitments is a liability account reported as a component of other liabilities in our consolidated balance sheets and is adjusted as a provision for credit loss expense. The estimate includes consideration
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of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to fund. The estimate of commitments expected to fund is affected by historical analysis looking at utilization rates. The expected credit loss rates applied to the commitments expected to fund are affected by the general valuation allowance utilized for outstanding balances with the same
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underlying assumptions and drivers. At September 30, 2023,March 31, 2024, our allowance for credit losses on unfunded commitments was $10.9$10.1 million compared to $12.0$11.3 million at December 31, 2022.2023.
Available for Sale Securities
We use our securities portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage interest rate risk and to meet pledging and regulatory capital requirements. As of September 30, 2023,March 31, 2024, the carrying amount of investment securities totaled $1.41$1.52 billion, a decreasean increase of $392.6$127.4 million, or 21.7%9.1%, compared with $1.81$1.40 billion as of December 31, 20222023. Securities represented 13.3%14.2% and 16.6%13.1% of total assets as of September 30, 2023March 31, 2024 and December 31, 2022,2023, respectively.
All of the securities in our securities portfolio are classified as available for sale. Securities classified as available for sale are measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, as accumulated comprehensive income or loss until realized. Interest earned on securities is included in interest income. The following table summarizestables summarize the amortized cost and fair value of the securities in our securities portfolio as of the dates shown:
September 30, 2023
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(In thousands)
March 31, 2024March 31, 2024
Amortized
Cost
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(In thousands)(In thousands)
Available for SaleAvailable for Sale
U.S. government and agency securities
U.S. government and agency securities
U.S. government and agency securitiesU.S. government and agency securities$409,152 $129 $(15,873)$393,408 
Municipal securitiesMunicipal securities258,901 545 (40,330)219,116 
Agency mortgage-backed pass-through securitiesAgency mortgage-backed pass-through securities378,573 22 (50,401)328,194 
Agency collateralized mortgage obligationsAgency collateralized mortgage obligations444,234 — (78,356)365,878 
Corporate bonds and otherCorporate bonds and other122,812 29 (14,485)108,356 
TotalTotal$1,613,672 $725 $(199,445)$1,414,952 
December 31, 2022 December 31, 2023
Amortized
 Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Amortized
Cost
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(In thousands) (In thousands)
Available for SaleAvailable for Sale    Available for Sale  
U.S. government and agency securitiesU.S. government and agency securities$433,417 $90 $(19,227)$414,280 
Municipal securitiesMunicipal securities580,076 4,319 (43,826)540,569 
Agency mortgage-backed pass-through securitiesAgency mortgage-backed pass-through securities370,471 362 (42,032)328,801 
Agency collateralized mortgage obligationsAgency collateralized mortgage obligations461,760 — (67,630)394,130 
Corporate bonds and otherCorporate bonds and other143,192 (13,388)129,806 
TotalTotal$1,988,916 $4,773 $(186,103)$1,807,586 
Investment securities classified as available for sale or held to maturity are evaluated for expected credit losses under ASC Topic 326, “Financial Instruments – Credit Losses.”326. See Note 43 – Securities in the accompanying notes to the consolidated financial statements for additional information. Management does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of September 30, 2023,March 31, 2024, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, including changes in interest rates and other market conditions, and therefore, no losses have been recognized in the Company’s consolidated statements of incomeincome.
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The following table summarizestables summarize the contractual maturity of securities and their weighted average yields as of the dates indicated. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures. Available for sale securities are shown at amortized cost. For purposes of the tabletables below, municipal securities are calculated on a tax equivalent basis.
September 30, 2023 March 31, 2024
Within One YearAfter One Year but Within Five YearsAfter Five Years but Within Ten YearsAfter Ten YearsTotal Within One YearAfter One Year but Within Five YearsAfter Five Years but Within Ten YearsAfter Ten YearsTotal
AmountYieldAmountYieldAmountYieldAmountYieldTotalYield AmountYieldAmountYieldAmountYieldAmountYieldTotalYield
(Dollars in thousands) (Dollars in thousands)
Available for SaleAvailable for Sale
U.S. government and agency securitiesU.S. government and agency securities$76,493 0.55 %$178,697 0.92 %$8,191 4.82 %$145,771 4.83 %$409,152 2.47 %
U.S. government and agency securities
U.S. government and agency securities$74,976 0.81 %$77,928 1.30 %$6,694 4.83 %$139,768 4.78 %$299,366 2.88 %
Municipal securitiesMunicipal securities— 0.00 %3,821 4.46 %70,471 2.82 %184,609 2.79 %258,901 2.81 %Municipal securities— 0.00 0.00 %2,102 4.76 4.76 %68,712 2.48 2.48 %151,995 2.68 2.68 %222,809 2.63 2.63 %
Agency mortgage-backed pass-through securitiesAgency mortgage-backed pass-through securities635 2.35 %14,555 3.93 %13,012 4.26 %350,371 3.04 %378,573 3.12 %Agency mortgage-backed pass-through securities627 2.78 2.78 %4,688 2.89 2.89 %11,865 4.33 4.33 %437,459 3.61 3.61 %454,639 3.62 3.62 %
Agency collateralized mortgage obligationsAgency collateralized mortgage obligations— 0.00 %17,230 2.80 %7,916 2.68 %419,088 1.55 %444,234 1.62 %Agency collateralized mortgage obligations— 0.00 0.00 %15,046 2.76 2.76 %13,986 4.93 4.93 %564,403 2.43 2.43 %593,435 2.50 2.50 %
Corporate bonds and otherCorporate bonds and other1,070 7.37 %3,000 6.20 %62,963 5.17 %55,779 2.94 %122,812 5.07 %Corporate bonds and other1,085 0.70 0.70 %3,000 5.75 5.75 %61,940 4.78 4.78 %51,606 3.02 3.02 %117,631 3.99 3.99 %
TotalTotal$78,198 0.65 %$217,303 1.42 %$162,553 4.11 %$1,155,618 2.78 %$1,613,672 2.63 %Total$76,688 0.83 0.83 %$102,764 1.79 1.79 %$163,197 3.79 3.79 %$1,345,231 3.11 3.11 %$1,687,880 2.99 2.99 %
December 31, 2022
Within One YearAfter One Year but Within Five YearsAfter Five Years but Within Ten YearsAfter Ten YearsTotal
AmountYieldAmount YieldAmountYieldAmountYieldTotalYield
(Dollars in thousands)
December 31, 2023December 31, 2023
Within One YearWithin One YearAfter One Year but Within Five YearsAfter Five Years but Within Ten YearsAfter Ten YearsTotal
AmountAmountYieldAmount YieldAmountYieldAmountYieldTotalYield
(Dollars in thousands)(Dollars in thousands)
Available for SaleAvailable for Sale
U.S. government and agency securities
U.S. government and agency securities
U.S. government and agency securitiesU.S. government and agency securities$76,438 0.54 %$173,380 0.92 %$16,081 4.96 %$167,518 4.92 %$433,417 2.55 %$84,932 1.35 1.35 %$78,193 1.31 1.31 %$7,442 4.69 4.69 %$136,962 4.61 4.61 %$307,529 2.87 2.87 %
Municipal securitiesMunicipal securities— 0.00 %21,195 3.45 %93,313 2.93 %465,568 3.39 %580,076 3.31 %Municipal securities— 0.00 0.00 %1,806 4.78 4.78 %67,735 2.35 2.35 %160,074 2.65 2.65 %229,615 2.58 2.58 %
Agency mortgage-backed pass-through securitiesAgency mortgage-backed pass-through securities3.21 %14,112 4.02 %11,201 4.53 %345,157 2.94 %370,471 3.03 %Agency mortgage-backed pass-through securities640 2.98 2.98 %4,852 2.92 2.92 %12,025 4.32 4.32 %407,147 3.45 3.45 %424,664 3.47 3.47 %
Agency collateralized mortgage obligationsAgency collateralized mortgage obligations— 0.00 %17,291 2.80 %8,008 2.70 %436,461 1.78 %461,760 1.83 %Agency collateralized mortgage obligations— 0.00 0.00 %11,170 2.80 2.80 %7,869 2.66 2.66 %443,459 1.90 1.90 %462,498 1.93 1.93 %
Corporate bonds and otherCorporate bonds and other1,050 1.25 %4,000 6.20 %64,176 4.64 %73,966 2.68 %143,192 3.66 %Corporate bonds and other1,077 2.50 2.50 %3,000 5.75 5.75 %62,368 4.75 4.75 %54,379 2.98 2.98 %120,824 3.96 3.96 %
TotalTotal$77,489 0.55 %$229,978 1.58 %$192,779 3.75 %$1,488,670 2.95 %$1,988,916 2.78 %Total$86,649 1.37 1.37 %$99,021 1.76 1.76 %$157,439 3.58 3.58 %$1,202,021 2.88 2.88 %$1,545,130 2.80 2.80 %
The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a reliable indicator of their expected life because borrowers may have the right to prepay their obligations. Mortgage-backed securities and collateralized mortgage obligations are typically issued with stated principal amounts and are backed by pools of mortgage loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay and, in particular, monthly pay downs on mortgage-backed securities tend to cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and, consequently, the average life of this security will be lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of thisthe security.
As of September 30, 2023March 31, 2024 and December 31, 2022,2023, we did not own securities of any one issuer (other than the U.S. government and its agencies or sponsored entities) for which the aggregate adjusted cost exceeded 10% of our consolidated shareholders’ equity.
The average yield of our securities portfolio was 2.72% during2.82% for the ninethree months ended September 30, 2023March 31, 2024 compared with 1.88%2.76% for the ninethree months ended September 30, 2022.March 31, 2023. The increase in average yield during 2023the first quarter of 2024 compared to the same period in 20222023 was primarily due to the mix of higher-yielding securities within the portfolio.
Goodwill and Core Deposit Intangibles
Our goodwill was $497.3 million as of both September 30, 2023March 31, 2024 and December 31, 2022.2023. Goodwill resulting from business combinations represents the excess of the consideration paid over the fair value of the net assets acquired. Goodwill is assessed
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annually for impairment and on an interim basis if an event occurs or circumstances change that would indicate that the carrying amount of the asset may not be recoverable.
Our core deposit intangibles, net, as of September 30, 2023March 31, 2024 was $122.9$110.5 million and $143.5$116.7 million as of December 31, 2022.2023. Core deposit intangibles are amortized using the straight-line or an accelerated method over the estimated useful life of seven to ten years.
Deposits
Our lending and investing activities are primarily funded by deposits. We offer a variety of deposit accounts having a wide range of interest rates and terms including demand, savings, money market and certificates and other time accounts. We rely primarily on convenient locations, personalized service and our customer relationships to attract and retain these deposits. We seek customers that will engage in both a lending and deposit relationship with us.
Total deposits at September 30, 2023March 31, 2024 were $8.69$8.79 billion, a decrease of $581.0$78.8 million, or 6.3%0.9%, compared with $9.27$8.87 billion at December 31, 20222023 primarily driven by seasonality, industry-wide pressures and the maintenance of pricing discipline in an intensely competitive market for deposits. Noninterest-bearing deposits at September 30, 2023March 31, 2024 were $3.66$3.32 billion, a decrease of $573.9$223.7 million, or 13.6%6.3%, compared with $4.23$3.55 billion at December 31, 2022.2023. Interest-bearing deposits at September 30, 2023March 31, 2024 were $5.03$5.47 billion, a decreasean increase of $7.1$144.9 million, or 0.1%2.7%, compared with $5.04$5.33 billion at December 31, 2022.2023. Estimated uninsured deposits totaled $4.73$4.80 billion and estimated uninsured deposits net of collateralized deposits of $865.7 million$1.03 billion were $3.86$3.77 billion, or 44.5%42.9%, of total deposits at September 30, 2023.March 31, 2024.
The following table sets forth the amount of time deposits that met or exceeded the FDIC insurance limit of $250 thousand by time remaining until maturity:maturity at March 31, 2024 (in thousands):
September 30, 2023
(In thousands)
Three months or less$174,313161,592 
Over three months through six months208,390164,968 
Over six months through 12 months136,494183,175 
Over 12 months40,98732,533 
Total$560,184542,268 
Borrowings
We have an available line of credit with the Federal Home Loan Bank ("FHLB") of Dallas, which allows us to borrow on a collateralized basis. FHLB advances are used to manage liquidity. The advances are secured by a blanket lien on certain loans. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits. At September 30, 2023,March 31, 2024, we had a total borrowing capacity of $3.82$3.52 billion, of which $2.28$2.14 billion was available and $1.54$1.38 billion was outstanding in/throughpursuant to FHLB advances and letters of credit. There were $324.0$215.0 million of FHLB short-term advances outstanding at September 30, 2023March 31, 2024 at a weighted-average rate of 5.62%5.60%.
Letters of credit were $1.22$1.17 billion at September 30, 2023, of which $50.8 million will expire during the remaining months of 2023, $72.8 millionMarch 31, 2024 and will expire in 2024, $494.5 million will expire in 2025, $57.3 million will expire in 2026, $448.0 million will expire in 2027, $40.0 million will expire in 2028, $27.0 million will expire in 2029 and $30.0 million will expire in 2031.the following periods (in thousands)
Junior Subordinated Debentures
2024$310,280 
2025296,200 
202657,300 
2027402,500 
Thereafter100,000 
Total$1,166,280 
In connection with the acquisition of F&M Bancshares, Inc., the Company assumed Farmers & Merchants Capital Trust II and Farmers & Merchants Capital Trust III. Each of these trusts is a capital or statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in the Company’s junior subordinated debentures. The preferred trust securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are wholly owned by the Company. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of the Company’s present and future senior indebtedness. The Company has fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not paid or made by such trust, provided
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such trust has funds available for such obligations. The junior subordinated debentures are included in Tier 1 capital under current regulatory guidelines and interpretations. Under the provisions of each issue of the debentures, the Company has the right to defer payment of interest on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the debentures are deferred, the distributions on the applicable trust preferred securities and common securities will also be deferred.
A summary of pertinent information related to the Company’s issues of junior subordinated debentures outstanding at September 30, 2023 is set forth in the table below:
Description
Issuance
Date
Trust
Preferred
Securities
Outstanding
Interest Rate
Junior
Subordinated
Debt Owed
to Trusts
Maturity
Date(1)
(Dollars in thousands)
Farmers & Merchants Capital Trust IINovember 13, 2003$7,500 3-Month SOFR + 3.26%$7,732 November 8, 2033
Farmers & Merchants Capital Trust IIIJune 30, 20053,500 3-Month SOFR + 2.06%3,609 July 7, 2035
 $11,341 
(1)All debentures are currently callable.
Subordinated Notes
In December 2017, the Bank completed the issuance, through a private placement, of $40.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the "Bank Notes") due December 15, 2027. As of December 15, 2022, the Bank Notes bore a floating rate of interest equal to 3-Month LIBOR plus 3.03%, which transitioned to 3-Month SOFR plus a comparable spread adjustment immediately after June 30, 2023, until the Bank Notes mature on December 15, 2027, or such earlier redemption date, payable quarterly in arrears. The Bank Notes are redeemable by the Bank, in whole or in part, on or after December 15, 2022 or, in whole but not in part, upon the occurrence of certain specified tax events, capital events or investment company events. Any redemption will be at a redemption price equal to 100% of the principal amount of Bank Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Bank Notes are not subject to redemption at the option of the holders. The Bank Notes are eligible for Tier 2 capital treatment, however, during the last five years of the instrument, the amount eligible must be reduced by 20% of the original amount annually and that no amount of the instrument is eligible for inclusion in Tier 2 capital when the remaining maturity of the instrument is less than one year. As the Bank Notes were within five years of maturity, only 80% of the notes are eligible for Tier 2 capital treatment at September 30, 2023.

In September 2019, the Company completed the issuance of $60.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the "Company Notes") due October 1, 2029. The Company Notes bear a fixed interest rate of 4.70% per annum until (but excluding) October 1, 2024, payable semi-annually in arrears on April 1 and October 1, commencing on April 1, 2020. Thereafter, from October 1, 2024 through the maturity date, October 1, 2029, or earlier redemption date, the Company Notes will bear interest at a floating rate equal to the then-current 3-Month SOFR, plus 3.13%, which transitioned from LIBOR immediately after June 30, 2023, for each quarterly interest period, payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year. Any redemption will be at a redemption price equal to 100% of the principal amount of Company Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Company Notes are not subject to redemption at the option of the holders.
Credit Agreement
On December 13, 2022, the Company entered into a loan agreement with another financial institution, or the (“Loan Agreement,Agreement”), that provides for a $75.0 million revolving line of credit. At September 30, 2023,March 31, 2024, there were no outstanding borrowings on this line of credit and the Company did not draw on this line of credit during 20232024 or 2022.2023. The Company can make draws on the line of credit for a period of 24 months, which began on December 13, 2022, after which the Company will not be permitted to make
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further draws.draws and the outstanding balance will amortize over a period of 60 months. Interest accrues on outstanding borrowings at a per annum rate equal to the prime rate quoted by The Wall Street Journal and with a floor rate of 3.50% calculated in accordance with the terms of the revolving promissory note and payable quarterly through the first 24 months. The entire outstanding balance and unpaid interest is payable in full on December 13, 2024.
The Company may prepay the principal amount of the line of credit without premium or penalty. The obligations of the Company under the Loan Agreement are secured by a pledge of all the issued and outstanding shares of capital stock of Stellar Bank.
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Covenants made under the Loan Agreement include, among other things, while there any obligations outstanding under Loan Agreement, the Company shall maintain a cash flow to debt service (as defined in the Loan Agreement) of not less than 1.25, the Bank’s Texas Ratio (as defined in the Loan Agreement) not to exceed 25.0%, the Bank shall maintain a Tier 1 Leverage Ratio (as defined under the Loan Agreement) of at least 7.0% and restrictions on the ability of the Company and its subsidiaries to incur certain additional debt. As of September 30, 2023,March 31, 2024, we believe we were in compliance with all such debt covenants and had not been made aware of any noncompliance by the lender.
Junior Subordinated Debentures
In connection with the acquisition of F&M Bancshares, Inc. in 2015, the Company assumed Farmers & Merchants Capital Trust II and Farmers & Merchants Capital Trust III. Each of these trusts is a capital or statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in the Company’s junior subordinated debentures. The preferred trust securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are wholly owned by the Company. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of the Company’s present and future senior indebtedness. The Company has fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not paid or made by such trust, provided such trust has funds available for such obligations. The trust preferred securities bear a floating rate of interest equal to 3-month SOFR, plus a spread adjustment. The junior subordinated debentures are included in Tier 1 capital under current regulatory guidelines and interpretations. Under the provisions of each issue of the debentures, the Company has the right to defer payment of interest on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the debentures are deferred, the distributions on the applicable trust preferred securities and common securities will also be deferred.
A summary of pertinent information related to the Company’s junior subordinated debentures outstanding at March 31, 2024 is set forth in the table below:
Description
Issuance
Date
Trust
Preferred
Securities
Outstanding
Junior
Subordinated
Debt Owed
to Trusts
Maturity
Date(1)
(Dollars in thousands)
Farmers & Merchants Capital Trust IINovember 13, 2003$7,500 $7,732 November 8, 2033
Farmers & Merchants Capital Trust IIIJune 30, 20053,500 3,609 July 7, 2035
 $11,341 
(1) All junior subordinated debentures were callable at March 31, 2024.
Subordinated Notes
In December 2017, the Bank issued $40.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the “Bank Notes”) due December 15, 2027. The Bank Notes bear a floating rate of interest equal to 3-Month SOFR plus a spread adjustment until the Bank Notes mature on December 15, 2027, or such earlier redemption date, payable quarterly in arrears. The Bank Notes are redeemable by the Bank, in whole or in part or in whole but not in part, upon the occurrence of certain specified tax events, capital events or investment company events. Any redemption will be at a redemption price equal to 100% of the principal amount of Bank Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Bank Notes are not subject to redemption at the option of the holders. The Bank Notes are eligible for Tier 2 capital treatment, however, during the last five years of the instrument, the amount eligible must be reduced by 20% of the original amount annually and that no amount of the instrument is eligible for inclusion in Tier 2 capital when the remaining maturity of the instrument is less than
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one year. As the Bank Notes are within five years of maturity, only 60% of the notes are eligible for Tier 2 capital treatment at March 31, 2024.

In September 2019, the Company issued $60.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the “Company Notes”) due October 1, 2029. The Company Notes bear a fixed interest rate of 4.70% per annum until (but excluding) October 1, 2024, payable semi-annually in arrears on April 1 and October 1, commencing on April 1, 2020. Thereafter, from October 1, 2024 through the maturity date, October 1, 2029, or earlier redemption date, the Company Notes will bear interest at a floating rate equal to 3-Month SOFR, plus 3.13%, for each quarterly interest period, payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year. Any redemption will be at a redemption price equal to 100% of the principal amount of Company Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Company Notes are not subject to redemption at the option of the holders.
Off-Balance Sheet Items
In the normal course of business, we enter into various transactions, which, in accordance with accounting principles generally accepted in the United States, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.
Commitments to Extend Credit. We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. The amount and type of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses.
Standby Letters of Credit. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. If the customer does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment and we would have the rights to the underlying collateral. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.
As of September 30, 2023March 31, 2024 and December 31, 2022,2023, we had outstanding $1.89$1.55 billion and $2.36$1.79 billion, respectively, in commitments to extend credit and $37.8$39.4 million and $35.5$37.7 million in commitments associated with outstanding letters of credit for those same periods. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.
Liquidity and Capital Resources
Liquidity
Liquidity is the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital, strategic cash flow needs and to maintain reserve requirements to operate on an ongoing basis and manage unexpected events, all at a reasonable cost. During the ninethree months ended September 30, 2023March 31, 2024 and the year ended December 31, 2022,2023, our liquidity needs have been primarily met by deposits, borrowed funds security and loan maturities and amortizing investment and loan portfolios.securities. The Bank has access to purchased funds from correspondent banks, the Federal Reserve discount window and advances from the FHLB, on a collateralized basis, are available under a security and pledge agreement to take advantage of investment opportunities.
Liquidity risk management is an important element in our asset/liability management process. Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. Liquidity stress scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs.
Our largest source of funds is deposits and our largest use of funds is loans. Average total deposits increased $2.79 billion,decreased $351.2 million, or 46.3%3.83%, and average loans increased $3.63 billion,$91.8 million, or 83.7%1.2%, for the ninethree months ended September 30, 2023March 31, 2024 compared to the ninethree months ended September 30, 2022.March 31, 2023. Estimated uninsured deposits totaled $4.73$4.80 billion and our estimated uninsured deposits net of
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collateralized deposits of $865.7 million$1.03 billion were $3.86$3.77 billion, or 44.5%42.9%, of total deposits at September 30, 2023.March 31, 2024. Our average deposit account size was $86$78 thousand at September 30, 2023.March 31, 2024. We predominantly invest excess deposits in Federal Reserve Bank of Dallas balances, securities, interest-bearing deposits at other banks or other short-term liquid investments until the funds are needed to fund
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loan growth. Our securities portfolio had a weighted average life of 7.57.9 years and 8.37.6 years at September 30, 2023March 31, 2024 and December 31, 2022,2023, respectively.
Total immediate contingent funding sources, including unrestricted cash, available-for-sale securities that are not pledged and total available borrowing capacity was $4.11$4.31 billion, or 47.3%,49.0% of total deposits at September 30, 2023.March 31, 2024. Including policy-driven capacity for brokered deposits, the Bank would have been able to add approximately $1.16 billion$979.3 million to its contingent sources of liquidity, bringing total contingent funding sources to approximately $5.27$5.29 billion, or 60.6%60.2%, of deposits at September 30, 2023.March 31, 2024.
As of September 30, 2023March 31, 2024 and December 31, 2022,2023, the Company had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.
Capital Resources
Capital management consists of providing equity to support our current and future operations. We are subject to capital adequacy requirements imposed by the Federal Reserve and the Bank is subject to capital adequacy requirements imposed by the FDIC. Both the Federal Reserve and the FDIC have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy. These standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate relative risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
Under current guidelines, the minimum ratio of total capital to risk-weighted assets (which are primarily the credit risk equivalents of balance sheet assets and certain off-balance sheet items such as standby letters of credit) is 8.0%. At least half of total capital must be composed of Tier 1 capital, which includes common shareholders’ equity (including retained earnings), less goodwill, other disallowed intangible assets and disallowed deferred tax assets, among other items. The Federal Reserve also has adopted a minimum leverage ratio, requiring Tier 1 capital of at least 4.0% of average quarterly total consolidated assets, net of goodwill and certain other intangible assets, for all but the most highly rated bank holding companies. The federal banking agencies have also established risk-based and leverage capital guidelines that FDIC-insured depository institutions are required to meet. These regulations are generally similar to those established by the Federal Reserve for bank holding companies.
Under the Federal Deposit Insurance Act, the federal bank regulatory agencies must take “prompt corrective action” against undercapitalized U.S. depository institutions. U.S. depository institutions are assigned one of five capital categories: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized,” and are subjected to different regulation corresponding to the capital category within which the institution falls. A depository institution is deemed to be “well-capitalized” if the banking institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 6.5% and a leverage ratio of 5.0% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific level for any capital measure. Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category.
Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory agencies, including: termination of deposit insurance by the FDIC, restrictions on certain business activities and appointment of the FDIC as conservator or receiver.
As of September 30, 2023March 31, 2024 and December 31, 2022,2023, the Bank was well-capitalized. Total shareholders'shareholders’ equity was $1.46$1.53 billion at September 30, 2023March 31, 2024 compared with $1.38$1.52 billion at December 31, 2022,2023, an increase of $77.7$9.7 million. This increase was primarily due to net income of $103.2$26.1 million partially offset by the $0.39$0.13 per common share dividend paid for the ninethree months ended September 30, 2023.March 31, 2024 and a $12.1 million increase in the accumulated comprehensive loss, which represents a decrease in the fair value of the Company’s securities.
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The following table providesis a comparisonsummary of our leveragethe Company’s and risk-weightedthe Bank’s actual and required capital ratios as of the dates indicated to the minimumMarch 31, 2024 and well-capitalized regulatory standards, as well as with the capital conservation buffer:December 31, 2023.
Actual
Ratio
Minimum
Required
For Capital
Adequacy
Purposes
Minimum
Required
Plus Capital
Conservation
Buffer
To Be
Categorized As
Well-Capitalized
Under Prompt
Corrective
Action Provisions
Actual
Ratio
Minimum
Required
For Capital
Adequacy
Purposes
Minimum
Required
Plus Capital
Conservation
Buffer
To Be
Categorized As
Well-Capitalized
Under Prompt
Corrective
Action Provisions
Stellar Bancorp, Inc. (Consolidated)Stellar Bancorp, Inc. (Consolidated)    Stellar Bancorp, Inc. (Consolidated)  
September 30, 2023    
March 31, 2024March 31, 2024  
Total Capital (to risk-weighted assets)Total Capital (to risk-weighted assets)13.42 %8.00 %10.50 %N/ATotal Capital (to risk-weighted assets)14.62 %8.00 %10.50 %N/A
Common Equity Tier 1 capital (to risk-weighted assets)Common Equity Tier 1 capital (to risk-weighted assets)11.14 %4.50 %7.00 %N/ACommon Equity Tier 1 capital (to risk-weighted assets)12.29 %4.50 %7.00 %N/A
Tier 1 Capital (to risk-weighted assets)Tier 1 Capital (to risk-weighted assets)11.25 %6.00 %8.50 %N/ATier 1 Capital (to risk-weighted assets)12.41 %6.00 %8.50 %N/A
Tier 1 Leverage (to average tangible assets)Tier 1 Leverage (to average tangible assets)9.82 %4.00 %4.00 %N/ATier 1 Leverage (to average tangible assets)10.41 %4.00 %4.00 %N/A
December 31, 2022
December 31, 2023
Total Capital (to risk-weighted assets)
Total Capital (to risk-weighted assets)
Total Capital (to risk-weighted assets)Total Capital (to risk-weighted assets)12.39 %8.00 %10.50 %N/A14.02 %8.00 %10.50 %N/A
Common Equity Tier 1 capital (to risk-weighted assets)Common Equity Tier 1 capital (to risk-weighted assets)10.04 %4.50 %7.00 %N/ACommon Equity Tier 1 capital (to risk-weighted assets)11.77 %4.50 %7.00 %N/A
Tier 1 Capital (to risk-weighted assets)Tier 1 Capital (to risk-weighted assets)10.15 %6.00 %8.50 %N/ATier 1 Capital (to risk-weighted assets)11.89 %6.00 %8.50 %N/A
Tier 1 Leverage (to average tangible assets)Tier 1 Leverage (to average tangible assets)8.55 %4.00 %4.00 %N/ATier 1 Leverage (to average tangible assets)10.18 %4.00 %4.00 %N/A
Stellar BankStellar Bank
September 30, 2023
March 31, 2024
March 31, 2024
March 31, 2024
Total Capital (to risk-weighted assets)
Total Capital (to risk-weighted assets)
Total Capital (to risk-weighted assets)Total Capital (to risk-weighted assets)13.13 %8.00 %10.50 %10.00 %14.13 %8.00 %10.50 %10.00 %
Common Equity Tier 1 capital (to risk-weighted assets)Common Equity Tier 1 capital (to risk-weighted assets)11.63 %4.50 %7.00 %6.50 %Common Equity Tier 1 capital (to risk-weighted assets)12.61 %4.50 %7.00 %6.50 %
Tier 1 Capital (to risk-weighted assets)Tier 1 Capital (to risk-weighted assets)11.63 %6.00 %8.50 %8.00 %Tier 1 Capital (to risk-weighted assets)12.61 %6.00 %8.50 %8.00 %
Tier 1 Leverage (to average tangible assets)Tier 1 Leverage (to average tangible assets)10.15 %4.00 %4.00 %5.00 %Tier 1 Leverage (to average tangible assets)10.59 %4.00 %4.00 %5.00 %
December 31, 2022
December 31, 2023
Total Capital (to risk-weighted assets)
Total Capital (to risk-weighted assets)
Total Capital (to risk-weighted assets)Total Capital (to risk-weighted assets)12.02 %8.00 %10.50 %10.00 %13.65 %8.00 %10.50 %10.00 %
Common Equity Tier 1 capital (to risk-weighted assets)Common Equity Tier 1 capital (to risk-weighted assets)10.46 %4.50 %7.00 %6.50 %Common Equity Tier 1 capital (to risk-weighted assets)12.20 %4.50 %7.00 %6.50 %
Tier 1 Capital (to risk-weighted assets)Tier 1 Capital (to risk-weighted assets)10.46 %6.00 %8.50 %8.00 %Tier 1 Capital (to risk-weighted assets)12.20 %6.00 %8.50 %8.00 %
Tier 1 Leverage (to average tangible assets)Tier 1 Leverage (to average tangible assets)8.81 %4.00 %4.00 %5.00 %Tier 1 Leverage (to average tangible assets)10.44 %4.00 %4.00 %5.00 %

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/Liability Management and Interest Rate Risk
Our asset liability and interest rate risk policy provides management with the guidelines for effective balance sheet management. We have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position within our established guidelines.
As a financial institution, a component of the market risk that we face is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
Based upon the nature of our operations, we are not subject to foreign exchange rate or commodity price risk. We do not own any trading assets. We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of a community banking business. The Company enters into interest rate swaps as an accommodation to customers.
Our exposure to interest rate risk is managed by the Balance Sheet RiskAsset Liability Committee of the Board (“BSRC”ALCO”). The BSRCALCO formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the BSRCALCO considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The BSRCALCO meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the BSRCALCO reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity.
We use an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and the balance sheet, respectively. All instruments on the balance sheet are modeled at the instrument level, incorporating all relevant attributes such as next reset date, reset frequency and call dates, as well as prepayment assumptions for loans and securities and decay rates for nonmaturity deposits. Assumptions based on past experience are incorporated into the model for nonmaturity deposit account decay rates. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
We utilize static balance sheet rate shocks to estimate the potential impact on net interest income of changes in interest rates under various rate scenarios. This analysis estimates a percentage of change in the metric from the stable rate base scenario versus alternative scenarios of rising and falling market interest rates by instantaneously shocking a static balance sheet.
The following table summarizes the simulated change in net interest income over a 12-month horizon and the economic value of equity as of the dates indicated:
Change in Interest
Rates (Basis Points)
Change in Interest
Rates (Basis Points)
Percent Change in Net Interest IncomePercent Change in Economic Value of EquityChange in Interest
Rates (Basis Points)
Percent Change in Net Interest IncomePercent Change in Economic Value of Equity
September 30, 2023December 31, 2022September 30, 2023December 31, 2022March 31, 2024December 31, 2023March 31, 2024December 31, 2023
+300+300(3.7)%0.5%(6.1)%(2.9)%+300(1.4)%(0.9)%(5.8)%(0.9)%
+200+200(2.7)%0.5%(3.5)%(0.7)%+200(1.1)%(0.6)%(2.7)%1.8%
+100+100(1.3)%0.4%(1.3)%0.6%+100(0.5)%0.1%(0.7)%3.4%
BaseBase0.0%0.0%0.0%0.0%Base0.0%0.0%
-100-1000.5%(2.0)%(0.3)%(3.2)%-100(0.3)%0.5%(1.4)%1.0%
-200-2000.4%(7.5)%(3.5)%(9.4)%-200(0.8)%0.2%(4.6)%(3.6)%
These results are primarily due to the size of our cash position, the size and duration of our loan and securities portfolio, the duration of our borrowings and the expected behavior of demand, money market and savings deposits during such rate fluctuations. During the ninethree months ended September 30, 2023,March 31, 2024, changes in our overall interest rate profile were driven by the decrease in noninterest bearing deposits and certain interest bearing deposits, increases in certificates of deposits and borrowed funds, an increase in loans and decreases in securities and cash and cash equivalents.
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LIBOR Transition
The Company’s transition away from LIBOR has been completed.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of the end of the period covered by this Quarterly Report on Form 10-Q. See Exhibits 31.1 and 31.2 for the Certification statements issued by the Company’s Chief Executive Officer and Chief Financial Officer, respectively.
Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2023March 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are subject to claims and litigation arising in the ordinary course of business. In the opinion of management, we are not party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels. However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which such claim or litigation is resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor. We intend to defend ourselves vigorously against any future claims or litigation.
ITEM 1A. RISK FACTORS

Adverse developments affecting the financial services industry, such as recent bank failures or concerns involving liquidity, and the soundness of other financial institutions may have a material effect on the Company’s operations.

Recent events relating to the failures of certain banking entities in the first quarter of 2023, including Silicon Valley Bank, Signature Bank and First Republic Bank have caused significant volatility in the trading prices of stocks of publicly traded bank holding companies and general uncertainty and concern regarding the liquidity and financial strength of the banking sector as a whole. In the future, events such as these bank failures could have an adverse effect on our financial condition and results of operations and cause volatility in our stock price.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. Stellar has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose Stellar to credit risk and losses in the event of a default by a counterparty or client. Any such losses could have a material adverse effect on Stellar’s financial condition and results of operations.

In response to these failures and the resulting market reaction, the Secretary of the Treasury approved actions enabling the FDIC to complete its resolutions of the failed banks in a manner that fully protects depositors by utilizing the Deposit Insurance Fund, including the use of bridge banks to assume all of the deposit obligations of the failed banks, while leaving unsecured lenders and equity holders of such institutions exposed to losses. In addition, the Federal Reserve Bank announced it would make available additional funding to eligible depository institutions under a Bank Term Funding Program to help assure banks have the ability to meet the needs of all their depositors. In an effort to strengthen public confidence in the banking system and protect depositors, regulators announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special
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assessment on banks, as required by law, which could increase the cost of our FDIC insurance assessments and may adversely affect our earnings. However, it is uncertain whether these steps by the government will be sufficient to calm the financial markets, reduce the risk of significant depositor withdrawals at other institutions and thereby reduce the risk of additional bank failures. As a result of this uncertainty, we face the potential for reputational risk, deposit outflows, increased costs and competition for liquidity, and increased credit risk which, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.
There have been no material changes in the risk factors previously disclosed by the Company. Investors should carefully consider the risks described in “Part I—Item 1A.—Risk Factors” in the Company’s Annual Reports on Form 10-K for the year ended December 31, 20222023 and the Company’s other SEC filings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In 2022, the Company’s Board of Directors authorized a share repurchase program, or the 2022 Repurchase Program, under which the Company may repurchase up to $40.0 million of the Company’s common stock starting September 22, 2022 through September 30, 2023. During the second quarter of 2023, the Company's Board of Directors authorized the expansion of its existing share repurchase program to provide that the Company may repurchase up to $60 million of the Company’s common stock through May 31, 2024.
Repurchases under the Company’s share repurchase program may be made from time to time at the Company’s discretion in open market transactions, through block trades, in privately negotiated transactions, and pursuant to any trading plan that may be adopted by the Company’s management in accordance with Rule 10b5-1 of the Exchange Act or otherwise. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and may be modified, suspended or discontinued at any time.
There were no repurchases by the Company under this plan during the three months ended September 30, 2023.March 31, 2024. The number of shares that may be repurchased under the plan was 2,814,258,2,463,054, which was computed based on the closing share price of the Company's common stock as of September 30, 2023.March 31, 2024.
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The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) of the Company’s common stock during the first quarter of 2024.
Period
Number of Shares Purchased(1)
Average Price Paid Per ShareShares Purchased as Part of Publicly Announced Plan
Number of Shares That May Yet be Purchased Under the Plan(2)
January 1, 2024 to January 31, 20241,827 $27.84 — 2,397,123 
February 1, 2024 to February 29, 2024— — — 2,531,645 
March 1, 2024 to March 31, 202422,590 23.38 — 2,463,054 
Total24,417 23.72 
(1)    Shares employees elected to have withheld to satisfy their tax liabilities related to options exercised or restricted stock vested or to pay the exercise price of the options as allowed under the Company’s stock compensation plans. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of the award stock.
(2) Computed based on the closing price of the Company’s common stock as of the end of each period shown.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
None of the Company’s directors or officers adopted, modified or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the Company’s fiscal quarter ended March 31, 2024, as such terms are defined under Item 408(a) of Regulation S-K, except that on March 8, 2024, Ramon A. Vitulli III, President of Stellar Bancorp, Inc., adopted a Rule 10b5-1 trading arrangement for the potential sale of up to 9,000 shares of the Company's common stock, subject to certain conditions. The arrangement's expiration date is December 31, 2024.
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ITEM 6. EXHIBITS
Exhibit
Number
Description
  
3.1
  
3.2
10.1*
10.2*
31.1*
  
31.2*
  
32.1**
  
32.2**
  
101.INS*Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
  
101.SCH*Inline XBRL Taxonomy Extension Schema Document
  
101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (embedded within the Inline XBRL document)
*    Filed with this Quarterly Report on Form 10-Q.
**    Furnished with this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Stellar Bancorp, Inc.
(Registrant)
Date: November 3, 2023April 26, 2024/s/ Robert R. Franklin, Jr.
Robert R. Franklin, Jr.
Chief Executive Officer
Date: November 3, 2023April 26, 2024/s/ Paul P. Egge
Paul P. Egge
Chief Financial Officer
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